How To Determine Price Per Square Foot?

Question

Hi fellow investors,

As I'm running Rental Property calculator analyses like it's my job, I'd love to know: how do you estimate the right price to pay for a property? @Brandon Turner says a rule of thumb is to pay for at least 20% less than what it's worth (that's what he defines as a deal). But how do you know what the property is truly worth (when it's not commercial)?

In his post, @Chris Clothier even says "We know in each zip code and often by neighborhood, the exact price per square foot that we want to pay.  That makes it very easy to make offers." How do you do that Chris?

Thanks in advance for the additional info.

Charlie MacPherson · Answer

@Cecile Poyet I can't speak to other markets, but around here the price per square foot is a non-linear function.  The smaller the home the higher $/sf cost.

I've run hundreds of comps over the last five years and while I do track $/sf, it's so widely variable that it's really not a very useful number.

Sean Tagge · Answer

Hello @Cecile Poyet,

There are dozens of companies that supply/sell data that tell you sqft and avg home sell price where you could derive your ppsqft number. Attom data solutions is one in particular. But really the best place to know that is the local MLS for example in Memphis you would want to talk to a realtor to pull you a spreadsheet all all homes within a .5 mile radius, +/- 200 sqft, sale prices, sqft etc.

but the data cannot tell you what the homes looked like, the condition of the home repairs/deferred maintenance, the look of home, the floorplan etc.

Marisa R. · Answer

You could phone local building contractors to find out build costs per sq foot and if you can buy for at leadt 20% less per sq foot its a possible buy?

Cecile Poyet · Answer

Thank you so much for the detailed additional information @Chris Clothier Out of curiosity, are there reliable public websites that show the average price per type of house per neighborhood?

Chris Clothier · Answer

Hey Cecile,

I think Memphis Invest is a bit of an anomaly in data like this because we are such a big company and have 16 years worth of data to pull from.  Most investors and even companies on this site are no where near our size nor as dialed in on KPIs and data.  It is impossible to find another company operating at this level so my answer is going to be a bit different than what you may find from a smaller company or individual investor.

I think the post or blog post you are referring to is from a while back.  Since our inception, we have kept records of every offer we have made on a property.  For a vast majority of the houses we have made offers on, we have known the square footage of those properties.  In a spreadsheet or CRM, it is fairly easy to enter a calculation where you have a line with the price per square foot of each offer.  The same can be said for every line item in a budget on a property such as renovation costs.  You can calculate your costs per square foot.

If you break your offers down by zip code, neighborhood or even street, then when you have have enough data in your set, you can begin to guesstimate your costs based on the data.

Today, we can be fairly certain what offer we need to make or at a minimum, reach a fairly small range for an offer, simply based on historical pricing per square foot and that offer can change based on the location of the property.

It just take time and offers as well as tracking the data to get a good picture of what your offer should be!

How To Determine Price Per Square Foot?

Most Popular Reply