Price Per Square Foot

25 Replies

Hi All! 

I'm an analyzing an REO in a neighborhood in my area and I have a question regarding square footage and calculating ARV. The comps are really small in square footage in comparison to my subject property so I'm having trouble analyzing this deal. I will put subject property info at the bottom as well as the supporting comps...maybe you guys can help me out? The subject property looks like it needs about 20K to 30K in repairs.

Subject Property: List Price - $174,000 | Beds: 3 Baths: 2 | Square footage: 2550

Comps (All within the last 180 days within Half a Mile Radius)

Comp  #1: Sold Price - $155,000 | Beds: 3 Baths: 2 | Square footage: 1051 

$104 PER SQ FT

Comp #2 Sold Price - $115,000 | Beds: 3 Baths: 2 | Square footage: 

$113 PER SQFT

Comp #3 Sold Price - $145,000 | Beds: 3 Baths: 2 | Square footage: 1222 

$118 PER SQFT 

Comp #4 Sold Price - $195,000 | Beds: 3 Baths: 2 | Square footage: 1818

$161.57 PER SQ FT

If I average out the price per square foot of all the properties, I have an average of $111 per square foot. 

If I multiply it by the square footage of my 2550 subject property that gives me an ARV of $283,000.

Would an appraiser adjust for the square footage difference this way? Thanks so much for your help in advance! 

Comp #        Sq Ftg        $$$/SF

#1                1051        $104
#2                1017        $113
#3                1222        $118
#4                1818        $162

Subject       2550        $?????

Notice any trends?
1 - Price/SF seems to go up as the Sf Ftg goes up.  This could mean that there is more of a demand for larger homes, or the larger homes are better built (more expensive finishes, etc...).  That could be telling you your $/SF could be higher yet.  To tell which might be true go back 2 months and see if the ratios are the same.

2 - This could also be telling you that your ceiling is just under $200k. Again, go back 12 months to see if there is a trend where the cost/sf goes up with the size of the property, but, once it reaches a size, it either slows down its increase/sf, or it just reaches a maximum ARV, and the sq ftg above that is just a bonus to the buyer.

Market analysis is everything, and the property analysis is just a result of how it fits into that market (actually micro-market).  Where are these comps in relationship to eachother?

@Jordan Stavrev I would not rely on per sq ft as a possible ARV value. Just as Joe stated there could be caps in the area or numerous other things that could cause your ARV to be off. If you are working with a real estate agent ask them to give you an ARV. If you aren't this would be a good time to network and find one. They are going to use like properties in determining that value so something around the same sq footage, same build, same year built etc...

Howdy @Jordan Stavrev

Are you using a realtor to get your comps?  You might widen search radius to see what you get.  Have you driven the area to get an idea of the type and size of properties that are there? What percentage of properties are similar to your subject property? 25%, 40%?  What percentage is similar to your comps?  Use this observation to help decide if your $111 per square foot is reasonable.  

Alternatively, you might develop an offer price that allows the acquisition, rehab, and holding costs, plus your minimum profit percentage for your ARV. Example offer $140K and ARV of $225K. But, that is really rolling the dice and hoping for profit.

I would continue to research and firm up your comps.

I see those real estate agents on the million dollar listing shows talk about price per square foot. But here in my area, that just doesn't translate and it isn't how appraisers appraise homes.

If your house is 2,500 sq ft, you need to find sold comps within that range (2200 to 2800). If you can't, then go out a little bit more (say 2,000 to 2900) and do some adjustments. Thats what an appraiser will do.

And thats one of the real problems with appraisals. If they choose to find lower size comps, they can really hose your appraisal.

If you have a 2,000 sq ft home and then pull a bunch of 1,500 sq ft comps and give you 5k or 10k as an adjustment, you're in trouble. Its not going to hit your number. What I find extremely interesting is that appraisers almost never pull comps of homes that are bigger than the one they're appraising.

Just once I'd like to have a 1,500 sq ft home and get a bunch of 2,000 sq ft comps with 10k adjustments down.  That thing will appraise out amazingly well if they did that. But I can say that when the appraisal misses my numbers it is almost always because they are pulling comps that are 500 to 600 sq ft or more smaller and giving some lame adjustment. 

So like Joe mentioned above, you cannot use square footage metrics to determine your ARV. Go further back in time. Go further out in distance. But you need to find some comps of bigger homes in order to get a sense of the real value.

Originally posted by @Jordan Stavrev :

Hi All! 

I'm an analyzing an REO in a neighborhood in my area and I have a question regarding square footage and calculating ARV. The comps are really small in square footage in comparison to my subject property so I'm having trouble analyzing this deal. I will put subject property info at the bottom as well as the supporting comps...maybe you guys can help me out? The subject property looks like it needs about 20K to 30K in repairs.

Subject Property: List Price - $174,000 | Beds: 3 Baths: 2 | Square footage: 2550

Comps (All within the last 180 days within Half a Mile Radius)

Comp  #1: Sold Price - $155,000 | Beds: 3 Baths: 2 | Square footage: 1051 

$104 PER SQ FT

Comp #2 Sold Price - $115,000 | Beds: 3 Baths: 2 | Square footage: 

$113 PER SQFT

Comp #3 Sold Price - $145,000 | Beds: 3 Baths: 2 | Square footage: 1222 

$118 PER SQFT 

Comp #4 Sold Price - $195,000 | Beds: 3 Baths: 2 | Square footage: 1818

$161.57 PER SQ FT

If I average out the price per square foot of all the properties, I have an average of $111 per square foot. 

If I multiply it by the square footage of my 2550 subject property that gives me an ARV of $283,000.

Would an appraiser adjust for the square footage difference this way? Thanks so much for your help in advance! 

Most of your $/sqft are incorrect.

$155,000/1051 =  147$/sqft not $104

$155,000/missing = ?

$145,000/1222 = 118$sqft so correct

$195,000/1818 = 107$sqft not $161

Generally you'll find the larger the sqft the _lower_ the $/sqft.

So assuming your #2 is correct, your average is (147+113+118+107)/4 = 121 not $111

Technically an appraiser will not just average, and will weigh each comp based on likeness to the subject, but averages come close enough for most people.

In this case I would remove the 147 as it's not even close to your subject and is skewing your comps significantly, in which case your average becomes (113+118+107)/3 = 112 which is by pure coincidence close to your original mistaken $/sqft of 111.

@Joe Villeneuve The comps are within half a mile radius of the subject property within the last 180 days. I adjusted the comps and looked at similar square footage homes within .75 mile radius and adjusted to the last 365 days and there is one comp that that's a 3/2 / 2300 SQ ft (quite outdated) down the street less than half a mile from the subject property that sold for $200,000.

I'm actually a realtor myself I was just asking if I could use the price per square foot however everyone has made good points on here and I won't rely on it. Honestly I think the ARV of the property with what we could do to in regards to repairs would probably be around $235,000. @Kuba F. @Mike H. @John Leavelle @Richard Ball

Hello Jordan,
Price per square footage means almost nothing when it comes to appraising. It is a piece of statistical information that is only worth using as a ballpark indicator for an entire market area. Adjustments for sf/gla for appraisals are usually done using paired sales analysis and/or market regression analysis. You should not rely on $/sf unless you have comparables that are very similar to the subject property, and sometimes that means you need to expand your sales search in time and distance.
Best wishes.

Jordan,
Your estimate appears to be logical. I ran a regression analysis with the comparables you provided and came up with a $60/sf adjustment needed between subject and comparables. Meaning that after adjusting for sf (and assuming no other major differences) the subject should be around $230,000.
Best wishes.

@Angelo C. Can you explain what a regression analysis is and an example of how you did it in regards to my comps? Would love to know. Thanks!

An appraiser will not adjust price per sqft. Unfortunately there is no straight forward way for an appraiser to give you that added value unless there is a similar 3/2 comp that justifies a higher price. In my experience the higher the sqft the lower the price per square foot for a particular bed and bath. If I were to guess you are looking south of 100 per sqft. You never want to be the biggest house in a neighborhood unless of course you can get it for a lower price. I hope this explanation was helpful.

Originally posted by @Jordan Stavrev :

@Joe Villeneuve The comps are within half a mile radius of the subject property within the last 180 days. I adjusted the comps and looked at similar square footage homes within .75 mile radius and adjusted to the last 365 days and there is one comp that that's a 3/2 / 2300 SQ ft (quite outdated) down the street less than half a mile from the subject property that sold for $200,000.

I'm actually a realtor myself I was just asking if I could use the price per square foot however everyone has made good points on here and I won't rely on it. Honestly I think the ARV of the property with what we could do to in regards to repairs would probably be around $235,000. @Kuba F. @Mike H. @John Leavelle @Richard Ball

I'm thinking your number is going to be $200k...but I would need to know the price history of all of your comps in order to lock in the ARV.

@Jordan Stavrev A lot of the previous posts hit the nail on the head. Ideally, you find comps that have a smaller GLA as well as larger GLA in order to "bracket" the square footage of the subject property. You may have to expand your search radius or your time frame and if so be sure to adjust for it. You want to avoid making "straight line" adjustments by making sure that the most important characteristics (GLA, date of sale, etc) are bracketed. Best of luck

@Jordan Stavrev no problem...For the sake of the forum, lets focus on square footage (which I previously referred to as GLA- gross living area). A good appraisal should include comps that are slightly smaller in square footage and need to be adjusted upward as well as comps that are slightly larger in square footage and need to be adjusted downward. This is what is referred to as "bracketing." Bracketing allows for the subject property to fit into a range of values that is derived directly from market data. 

When the subject property isn't bracketed, as is the case with your example that started this thread, there is no direct market evidence that sets a range of values. Therefore, a "straight-line adjustment" occurs where all of the comps are smaller and there is no indicator of value that is setting the upper limit of value due to it being larger than the subject.

Its not uncommon to have limited comps that don't allow you to bracket, but the appraisal is not as reliable when this is the case. 

Hi Jordan, The short answer is no, an appraiser will not value the property that way. 

In order to figure out true ARV I would partner with a good broker in your area who is well versed in buying trends and the type of people buying in that particular area.

Lastly, are you positive the REO property has 2500 sqft and the others were much smaller?

Originally posted by @Jordan Stavrev :

@Angelo C. Can you explain what a regression analysis is and an example of how you did it in regards to my comps? Would love to know. Thanks!

 @Jordan Stavrev , 

Regression analysis is a statistical model to estimate the relationship between variables (price and sf in this case). There are many versions of regression analysis and it can also be used with multiple variables ( e.g. room count, site size, garage count, etc).

I use a simple excel sheet to run my regression analysis. I can PM you detailed instructions on how I do mine if you want to try it. 

Best wishes.

Answering regarding would appraiser do differently. Yes. Regarding square foot they are going to use square foot calculations ONLY for the additional square footage after adjusting price for rooms/condition/etc/features etc. The $per square foot adjustment will also be a set number they determine and in my experience likely 1/4 to 1/3 the simple home price divided by square feet price. So example - 100k one thousand square foot comp is exactly same for features and lot etc but is 100 square feet smaller. They will value the additional square footage say 30 a square foot and add only 3k to the price (NOT 10k).

I am not saying the above will represent the market price. Just answering regarding the process the appraiser will use.

In a lot of areas, the smaller the house the the higher the square foot price. This is definitely the case in areas with high lot cost. The reason is simple, the lot cost, water tap, sewer connection, etc. must all be rolled into the house cost. If your lot and development cost is 250k, then you need to build a larger house to "peanut butter" this cost across more sq footage. I see this all the time in the Boston Metrowest area. 

 Were the comps you gave remodeled homes or did they need work? Make sure your comparing apples to apples as much as possible. 

What I often see is that appraisers come in at purchase price. I just built a home in an older lake neighborhood and we sold it for way more then anything previously sold in the neighborhood. The appraisal came in at sale price. 

Some areas are very sensitive to square footage and some are not.  It is about taking the entire picture and putting it together.  SQFT helps but is not a hard and fast rule.  

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here