Price Per Square Foot - Pitfalls in Valuing Real Estate

An appraiser I know stopped by to chat, and we discussed an interesting topic — When is price per square foot a good indicator of a home’s value?  

The answer is:  Sometimes.

The Simplest Yardstick

Price per square foot is the very simplest yardstick of home value.  It uses only two factors, ignoring the other myriad details that affect value.  If we compare two homes of equal square footage, there will be at least 30 items that contribute to value… finishes, construction quality, number of rooms with plumbing (plumbing rooms may be the most expensive footage in a home), age, general condition, and size of the lot, to name a few.

Works Well in Planned Suburbs

In a suburban neighborhood, most of the homes were built about the same time, usually by the same builder, and on similar lots.  In effect, many of the variables have been standardized.  So you have a large pool of comparable houses, and a simple ratio comparing size vs. price can often give good results.

Breaks Down in Older, Custom-Built Neighborhoods

However, the same is not necessarily true in the older neighborhoods of Houston’s Inner Loop.  As we near the center of the city, the value of land goes up dramatically while the value of older structures may go down.  In West U, it is perfectly possible to find a small 1930’s cottage with its original tile and plumbing fixtures sitting on a huge double lot.  Right next door, you may find a big new home with granite counters and stainless appliances, but this new home is built on a small lot.  The trick is that the price of both these homes may be exactly the same – but one is valuable because of its structure and one is valuable because of its land.  In this case, price per square foot will NOT be a good indicator of value, because the cost of the land and the age of the structure are ignored in the calculation.

When in Doubt, Get an Appraisal

If you examine a professional appraisal, you will see the proper way to value a property.  The appraisal will contain a column for your property, plus two or three other comparables homes. Each column will show a long laundry list of items, ranging from lot size, number of rooms, to, yes, square-footage. Each of these will have a plus and minus to “adjust” the value of the property being appraised.

So, when you are valuing a property, use the simplified price per square foot only as a starting point for comparisons.  Be aware that many other variables can be equally important in determining the value of a home, especially in Houston’s older neighborhoods.

Roger Martin