Price per square foot calculation is a recipe for disaster
When pricing residential real estate (as opposed to commercial real estate), unless a kind-for-kind condo, trying to compare two properties based on their price-per-square-foot calculation is a recipe for disaster.
First off, I can think of 3 very important aspects to a property that are being ignored when you try to do this:
The Location and Lot The location and land upon which the house is completely ignored in this calculation. If you were to create two identical houses and placed one on a 5k square foot lot on the side of a hill and the other on a flat, 10k square foot corner lot, do you really expect them to sell for the same price? Of course not – but the $/sqft metric doesn’t account for that.
The Usage Not all square feet are created equal How much would you value an extra 300 square feet in your house? Would you enjoy a larger living room or den? Of course you would, but what if I said that 300 square feet went to an additional bathroom? In the eyes of a buyer, the extra bathroom adds way more value to the house than a larger living room or den. But again, the $/sqft metric doesn’t account for that.
The Condition If a house has a brand new roof and a completely high end remodeled kitchen with granite counter tops and stainless steel appliances, would you expect to pay the same amount as you would for a dated, 1950s rancher? Of course not. And again, the $/sqft metric doesn’t account for that.
I hope it’s obvious how the price-per-square-foot calculation isn’t enough (on its own) to properly compare the prices of two properties against each other.
Where it does work is if you are comparing kind-for-kind homes in a development or a Condominium building where amenities, view and fixtures are comparable.
True market value is what a buyer will offer, and a seller will accept.
Format for pricing work or estimating costs. Best for things such was drywall install, flooring, painting, etc. If you need to install wood flooring in a bedroom of 100 SF and your contractor quotes you $400, you’re paying $4/SF. He may also quote it as $4.00/SF.
Not as useful for things such estimating the cost of plumbing fixtures. Some people will still use $/Sf for conceptually estimating overall plumbing or electrical costs for ground up construction. Typically very early on a project for underwriting.
Hope this helps. Feel free to ask more questions.
Format for pricing work or estimating costs. Best for things such was drywall install, flooring, painting, etc. If you need to install wood flooring in a bedroom of 100 SF and your contractor quotes you $400, you’re paying $4/SF. He may also quote it as $4.00/SF.
Not as useful for things such estimating the cost of plumbing fixtures. Some people will still use $/Sf for conceptually estimating overall plumbing or electrical costs for ground up construction. Typically very early on a project for underwriting.
Hope this helps. Feel free to ask more questions.
what is it generally used for if you buy and hold properties. Im speaking about multifamily properties btw. I don't know if it different for SFH or not.
For Multifamily, you’re going to have 2 per SF metrics. Gross SF which is (just about) the entire building. You also have Net Rentable SF which is typically the more important factor. Not really important but most urban large Multifamily buildings. (>40 units) will have an efficiency (NRSF/GSF) between 70-85%.
As for the price per SF for buy and hold, some owners will want to know the sales price on a per GSF or NRSF basis. Can be useful to compare to properties. Not really a measure of profitability but more comparative.
In my area SFR rental pricing seems to be more related to number of bedrooms and bathrooms and the sq footage of the property seems to be of lower impact. ie, we have a 960 foot 3 bed 1.5 bath that rents for $790, a 1200 foot 3/2 for $850 and a 4/1 1400 foot for $780.
We currently have an offer pending on a 3/1.5 that's 1700 feet and we estimate that will rent for $900. Mostly because it has a large workshop on the property.
Price per square foot calculation is a recipe for disaster
When pricing residential real estate (as opposed to commercial real estate), unless a kind-for-kind condo, trying to compare two properties based on their price-per-square-foot calculation is a recipe for disaster.
First off, I can think of 3 very important aspects to a property that are being ignored when you try to do this:
The Location and Lot The location and land upon which the house is completely ignored in this calculation. If you were to create two identical houses and placed one on a 5k square foot lot on the side of a hill and the other on a flat, 10k square foot corner lot, do you really expect them to sell for the same price? Of course not – but the $/sqft metric doesn’t account for that.
The Usage Not all square feet are created equal How much would you value an extra 300 square feet in your house? Would you enjoy a larger living room or den? Of course you would, but what if I said that 300 square feet went to an additional bathroom? In the eyes of a buyer, the extra bathroom adds way more value to the house than a larger living room or den. But again, the $/sqft metric doesn’t account for that.
The Condition If a house has a brand new roof and a completely high end remodeled kitchen with granite counter tops and stainless steel appliances, would you expect to pay the same amount as you would for a dated, 1950s rancher? Of course not. And again, the $/sqft metric doesn’t account for that.
I hope it’s obvious how the price-per-square-foot calculation isn’t enough (on its own) to properly compare the prices of two properties against each other.
Where it does work is if you are comparing kind-for-kind homes in a development or a Condominium building where amenities, view and fixtures are comparable.
True market value is what a buyer will offer, and a seller will accept.
When pricing residential real estate (as opposed to commercial real estate), trying to compare two properties based on their price-per-square-foot calculation is a recipe for disaster. First off, I can think of 3 very important aspects to a property that are being ignored when you try to do this:
For buy and hold evaluations, I use price per square foot analysis to get a ball park understanding of a property value relative to it’s location. For example in Nashville $125-$225 per sq. ft. is about the range most properties are selling at now. If you catch something for $60-$70 per sq ft it may be worth a more thorough analyzing method. I wouldn’t get carried away with it just use it for quick ballpark stuff.