Evaluating Price Per Square Foot as an Indicator of Value

Evaluating Price Per Square Foot as an Indicator of Value

The Metro Denver real estate market is hot! Even so, buyers don’t want to overpay for a home. Likewise, sellers want to get the highest price they can for their home.

When looking at homes buyers often ask, “What is the price per square foot for the home?” Likewise, sellers may say, “The home down the street sold at so much per square foot, so why shouldn’t mine sell for at least that much?” These seemingly simple questions can actually be quite complicated. Solely using price per square foot may not be a good basis on which to compare home prices. Here’s why:

Measuring Price per Square Foot

Square footage can be measured in a variety of ways

It’s important to know whether the measurement includes:

  • above ground square feet only
  • below ground square feet
  • main level and upper level
  • finished square feet only
  • finished or unfinished square feet in a basement
  • all or some levels in a tri-level
  • any garages
  • the surrounding lot.

Unless price per square foot is based on exactly the same criteria, the comparison may not be valid.

It’s important to compare “like” homes

“Like” means homes approximately the same style (i.e. single family or condo), age, number of bedrooms and bathrooms, stories, location, lot size, and price range. Factors such as views or special amenities can be important to review. If you don’t compare “like” homes, you can get a substantial range in square foot prices.

The square foot price of smaller homes is typically higher than the square foot price of larger homes

Both small and large homes have many of the same elements. Take a front door, for example. In dividing the cost of the same front door by the square footage of both small and large houses, you will discover that the front door costs more per square foot in the smaller house. Doing this with all the elements in the house, you will find that smaller homes cost more per square foot than larger homes.

The quality of finishes is not calculated in price per square foot

Finishes are not considered in price per square foot yet can make a measurable difference between homes. Take two different 2,000 square foot homes. One has been totally updated, including kitchen and baths with high end finishes, while the other has not been updated. Should the price per square foot be the same? Probably not.

New construction square foot prices can often be higher than existing homes square foot prices

New construction prices can vary significantly based upon the builder, quality, options, amenities, and location (from neighborhood, to local area, to nationwide). Often the first re-seller of new construction takes a “hit” on their selling price. One reason for this is that builders mark up options selected by the buyer considerably. Many people prefer to select their own options and finishes rather than paying for someone else’s choices that they don’t particularly like, and therefore the resale square foot pricing may be reduced. Also, from the time the home was built to the time the first seller goes to sell, many changes may have taken place in the area that may affect the pricing, such as more available new construction.

While comparing homes based on price per square foot, keep these five factors in mind. The better deal may not be indicated by the property with the lowest price per square foot. As a buyer, you can make decisions based on price per square foot as long as you take the factors listed above into consideration. Sellers may be able to utilize price per square foot calculations when listing their home, but in the end, willing buyers are the ones who determine the price of a home.

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