Price per square foot is one of the most popular metrics for estimating the value of a home, but how accurate is it? As with most aspects of real estate, the answer is, it depends.
Price per square foot can be an accurate measure when comparing apples to apples. For example, in a new neighborhood where all the homes are of the same approximate age and level of finish, the price per square foot that one home sells for can be taken as a reasonable indication of what neighboring homes will sell for.
Matters become a little more complicated in comparing homes of different age, style and condition, as is often the case in smaller markets like we have in our area. Here, using price per square foot as the primary indicator can often do more harm than good. Smaller markets produce a smaller pool of comparable sales, so nuance when pricing a home becomes more important: What kind of upgrades has the home had? What is the zoning? What is next door to it?
Further complicating the process, not all square footage is valued equally. A 1500-square-foot home with a 1500-square-foot basement will only be appraised as a 1500-square-foot home. Appraisers can only take into account above-grade living area, so even a fully finished basement will not be taken into account where square footage is involved.
There are exceptions – value can be attached to a walk-out basement, and below-grade bedrooms can be counted as bedrooms if they have the required egress. This is not to say that basements do not add value in other ways. Having that extra living space can make the home more attractive to potential buyers but cannot be used by an appraiser when calculating the value.
Many older homes have attic spaces that have been converted to serve many different uses – an extra bedroom, an office, a master suite, to name a few. But even here, only the area where the ceiling height is a minimum of 7 feet can be counted as living space and therefore added to the square footage count.
How the square footage is used also plays a part. Two homes of identical square footage and age sit side by side. One has three bedrooms but only one bathroom. The other has two bathrooms but only two bedrooms. Which has more value than the other?
As with most things associated with real estate, calculating the weight to place on square footage when valuing a home is part science, part art, and in-depth knowledge of the market is critical.