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Why Smaller Homes Sell More Per Square Foot?

Discussion in 'Ask an Appraiser' started by Ivan Alfonso, Jul 26, 2004.

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  1. Ivan Alfonso

    Ivan Alfonso New Member

    0
    Jul 1, 2004
    Are there any articles written on the theory behind, why smaller homes sell more per square foot? Sometimes I have a real estate agent telling me that "this house is much smaller and it sold for $100.00 per square foot, why is the subject property, which is larger selling under this price per square foot?"
     
  2. Scott Kibler

    Scott Kibler Elite Member

    48
    Oct 7, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois
    Think about the contribution of land to the total market value.
     
  3. Bobby Bucks

    Bobby Bucks Elite Member

    106
    Jan 27, 2002
    Professional Status:
    Real Estate Agent or Broker
    State:
    North Dakota
    It's the reverse of economy of scale. Even though the improvements may be smaller with regard to living area, the cost for most necessary components remain fixed ie. the HVAC, plumbing fixtures, etc. This is your article. Print it and it will save you time and ink. :)
     
  4. Caterina Platt

    Caterina Platt Senior Member

    0
    Jan 17, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    New Mexico
    Let me see if I can re-create the explanation from an Appraisal Institute class of several years ago.

    Let's consider a 3 Bedroom, 2 bath ranch. Both homes will have the same number of plumbing fixtures and upgrades. Your first home is a 1100 SF with a single living area. The expensive items in construction are often your plumbed areas and their fixtures and cabinets, ie. bathrooms and kitchens. Your distributing the cost of these out over a smaller dwelling as a whole.

    Now, consider your 3 bedroom, 2 bath with 2 living areas (a den and a living room) and stretch the bedrooms out a bit. Take the total living area up to 1600 SF. What have you added to accomplish a larger home? Basically, you've added foundation, carpet, trusses, shingles and drywall. This less expensive addition of living area has lowered your cost per square foot.
     
  5. Joker

    Joker Elite Member

    0
    May 28, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Ohio
    Ditto the above comments. Economies of scale. Additonal square feet do not cost as much as the initial.
     
  6. Dee Dee

    Dee Dee Elite Member

    1
    Jan 16, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    Good points.

    Add to that, generally speaking there is a larger pool of potential buyers who can afford smaller homes versus those who can afford larger ones, so the demand tends to drive the price per square foot a little higher.
     
  7. Tim Hicks (Texas)

    Tim Hicks (Texas) Elite Member
    Gold Supporting Member

    38
    Jan 15, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Texas
    If you are in a typical neighborhood with similar lots and lot values, the lot value is a constant value. Therefore, a smaller home say 1500 SF at $120,000 with a $30,000 lot sold for $150,000 or $100.00 a foot. However, the home next door has a 1,800 SF house at $144,000 with the same $30,000 lot sold for $174,000 or $96.67 per foot.


    Price per square foot is a greatly exaggerated tool that Real Estate agents use. There are too many factors that go into the total price that can skew the price per foot. Pools, larger lots, workshops, etc. It is not wise to base decisions on a total price per foot.
     
  8. Carnivore

    Carnivore Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    North Carolina
    Ivan

    heres an example of what they are all talking about.

    Imagine a two story house with an attached 2 stall garage on the end. Above this garage there is a double pitched roof system that is unfinished attic and accessed from the 2nd floor via a hallway.

    This house is currently being offered for sale and the builder says he will finish the upstairs for X bucks. You and your bride look at the additional cost and its seems like a deal because the builder is chargeing the 100 Bucks per sft for the current house and will only charge you 50 bucks extra per sft for the new room.

    See picture to understand Caterinas post!


    As you can see there is litte extra to do for an extra 12 x 22 foot room.

    p.s. Builders always over charge for this extra sft!
     
  9. Ryan Nyberg

    Ryan Nyberg Senior Member

    0
    Jan 15, 2002
    Professional Status:
    Gvmt Agency, FNMA, HUD, VA etc.
    State:
    Washington
    Cat hit it right with the easiest Layman explanation.
     
  10. KD247

    KD247 Senior Member

    0
    Jan 24, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Hi Ivan,

    You're not likely to find any serious articles that deal with the $/sf factor, because it's not generally regarded as a meaningful number. Intuitively, "Price per Square Foot" sounds like a reasonable way to compare some value related aspect of two properties, but one can't usually draw valid conclusions from this number.

    The pointlessness of Price per Square Foot is most apparent in places where the value of the site makes up most of the home's total cost. For example, in some metropolitan areas, we could compare an $800,000 800sf home at $1,000/sf with a 3,000sf home on a similar site that sells for $1,200,000 ($400/sf). The $600/sf difference might get your attention, but it would be ridiculous to infer that the 3,000 sf home is the better deal.

    Now, as we head toward the desert wastelands, the value of vacant sites drops dramatically and we begin to see places where lots can be purchased for the price of a used car. As site values get closer to zero, Price per Square Foot begins to give the illusion that it is a reasonable way to compare properties. But, even if the land has absolutely no value, there are still other variables involved, the most obvious being differences in quality (construction costs per square foot).

    Consider two homes built on "free" sites. Assume that both homes cost exactly the same, per square foot, to build. A $240,000 2,400sf home and a $300,000 3,000 sf home both have a Price per Square Foot of $100/sf. Now suppose that the larger home sold for $330,000 with a Price per Square Foot of $110. We can still only guess at what caused for the $10 per Square Foot variance. Did the buyers of the smaller home really get a better deal, or is it that buyers in this area are willing to pay a premium for a larger home? Is there some other variable that we're unaware of (a view, an odor, etc.)? Or, is the difference simply due to normal inconsistencies in the market?

    Now take the same example, but with the difference accounted for by differences in construction costs per square foot. The Price per Square Foot would simply be a direct reflection of construction costs.

    In my experience I've only seen Price per Square Foot used to support a predetermined conclusion or a salesperson's agenda. It sounds like a valid comparison, so when someone wants to illustrate that a house is a good value it's a convenient number to produce. However, that same person will likely ignore the Price per Square Foot if it doesn't support their case.

    Your question makes a few assumptions that should probably be checked: that Price per Square Foot is a valid measure, that one can identify the primary variables that contribute to Price per Square Foot differences, and that Price per Square Foot differences are causally related and are not just coincidences.

    If an agent told me that the larger house is selling for less per square foot than a smaller house, my first question would be, "Why should I care?"
     
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