The value of any real estate is ultimately what a buyer is willing to pay for it, particularly when it comes to cash buyers. Of course, overpaying for a property when there is a financing contingency will typically not occur due to the proper appraisal and loan approval processes. With this said, we often see both buyers and sellers fixated on the “price per square foot” valuation of a property. Before we begin to discuss this endpoint, we want to confirm that the price per square foot is certainly a surrogate endpoint when determining a proper valuation for a property. However, it is equally important to note that it is not the only endpoint that should be considered. Having worked with many buyers and sellers throughout the South Florida market, it is safe to say that it is not uncommon for many to solely focus on the price per square foot of a property. Ultimately, there are many factors that should be considered when determining the value of a home and it is important to not focus on just one.
How to calculate price per square foot
When determining the price per square foot of a property, there are primarily two methods:
- You divide the price by the total square footage of the home.
- You divide the price by the total living square footage of the home.
The method most commonly used by both real estate appraisers and real estate agents is to divide the price by the total living square footage of the home. To clarify, the total living square footage of the home is considered to be the total climate controlled portion of the home.
For example, let’s say that the average home price in your neighborhood is $600,000 and the average living square feet of the homes is 3,000 feet. This would reflect an average price per (living) square foot of $200. ($600,000/3,000 square feet = $200/square foot) Therefore, if your home in this neighborhood contains 2,500 living square feet, then based on this formula it would only be worth $500,000. Of course, this methodology does not take into consideration an upgrades to the home. Perhaps you recently had a new roof installed or completed a major renovation? What about the new pool that you added? As you can see, the price per square foot does not take any of these factors into consideration. Ultimately, relying on this sole methodology will almost always be flawed.
Summary
In closing, the price per square foot methodology to valuating a home can be used as a tool, but should not be solely relied upon. For more information on this and to view a helpful video, click here. Whether you are buying or selling a home, it is crucial that you work with a local and knowledgeable real estate agent. If you are in the South Florida area, be sure to contact Natasha at Live South Florida Realty, Inc. In addition, you will want to download the free Florida Home Search app for your mobile device. This comprehensive real estate app has been assisting many of our clients and will result in a more efficient home search.
