$ per Square Foot Significance

[Pamela Crowley (Florida)]

I need some discussion on this because this is a current big issue with the Realtors here these past few weeks.

When it comes to the $ per SF, what do the rest of you do with this figure? I know it's pretty much always real close in the cookie cutter subs but when you get out into custom country territory, it goes all over the board and I don't pay that much attention to it. It only starts to make sense after everything else is adjusted for.

Anyway, I now have a Realtor that took my appraisal with 5 comps up and is doing a 'razzle-dazzle' on me about it. My range is $92.75 on comp 5 which is an active listing on the subject street to $102.89 for a similar property that is quite a bit smaller in GLA. My subject appraised value ends up at $91.00 per SF. The larger the GLA, the smaller the $ per SF and my subject is larger than comps 1-3, 4 and 5 were used because of this and all when adjusted support my value. There are location and acreage adjustments involved here. My Client is not questioning me at all, just the Realtors. Hey, I'm trying real hard to be nice.

I have a screaming headache and am not handling this Realtor very well right now. I've looked in some of my appraisal books and the $ per SF is not really discussed except as an adjustment which doesn't really relate to the total $ per SF. Anyone know of anything in writing regarding this issue? I'm really sick of the Realtors using the $ per SF against me lately, especially when they pick the highest one they can find to price the property. Somebody give me some ammunition, please.

 

[Ted Martin]

How about, You're the appraiser and you said so.

I've been caught in the same bind by a couple of local builders who have come back with "you don't buy a car by the pound" argument. I've agreed with their point and have ask for any information they have on an alternate method I could use. They've never been able to come up with anything I could use. Oh what a suprise. You're on the right track when you responded that the site and site amenities have to come out first to make the $/perFT even remotely meaningful.

 

[larryhaskell]

Pamela:

Why are you spending your time even talking to the realtor? That old $ per square foot trick is standard for realtors that don't know what they're doing or just want the highest sale price possible. It combines all of the characteristics of a property and gives them equal weight which may work sometimes for the cookie cutters but seldom if ever for other types of properties. When you adjust for the square footage, you're right that its for that one characteristics by itself. I don't believe there is a standard rule of thumb except paired sales analysis. If square footage is the only difference, you should be able to determine the contributory value of each additional square foot. I was taught at one time that a guide is 66% of the cost to construct each additional square foot. I don't really believe this system makes much sense either. In many cases, the larger the total square footage, the less important each additional square foot matters. Your biggest challenge right now is keeping that realtor from playing with your mind.

 

[wyecoyote]

Pamela,

Is this what your looking for.

Price per Suare foot of Gross Living Area

The uninformed reader or one unfamiliar with residential markets may give this ration too much relevance. This unito of comparison is significant in nonresidential appraisals where the sales comparables are of lesser quality. In nonresidential appraisals, it is common to compare a sale of a property with a 5,000 sq ft building to a sale of a property improved with a 25,000 sq ft building. The price per square foot of gross building area (GBA) reduces these significantly different sales to a usable rate. This unit of comparison is unneeded in most residential assignments because of the better-quality comparisons avaliable to residential appraisers. The price per square foot of GBA will vary depending on the size or value of the site, the inclusion or exclusion of basement levels and or variances in age of improvements. All of these affect the price but do not affect the price per square foot of GBA, which will cause the rate to be skewed. This analysis is given little consideration by most appraisers and under-writers.

This was taken from Residential Sales comparison approach deriving, documenting, and defending your value opinion. by Mark R. Rattermann, MAI, SRA


Continuing in the thought of the above and how I interperet what he means. The $ per SF method may not really reflect everything. Completing this way you still have to subtract the cost of land, improvments to the land (septic/sewer well/public water) outbuildings, decks/porches/patios, garages and other improvements that effect the $ per square foot. Then you actuall reach a $ per square foot for the structure. This is what to me the realtors do not take into account when they use the $ per square foot method. Their is also a class by the appraisal institute that follows this thinking called "Appraising the tough Ones" The class goes into the $ per sf but includes that all improvements other than the GLA must be subtracted first to arive at a $ per SF.

Hope this is what your looking for. :twisted:

Ryan

 

[Mountain Man]

Ryan, very good answer. One point I have used many times is in the comments from Mark R. "The price per square foot of GBA will vary depending on the size or value of the site".

Sometimes I use the same explanation that it also depends on quality, features, finishes, and special extras perceived by the market, and supported by paired sales. "All of these affect the price but do not affect the price per square foot of GBA, which will cause the rate to be skewed."

 

[wyecoyote]

M Leggett,

I agree with you that was also in the class that I took. They had some good examples as to the differences in quality/condition will also effect the $ per sf.

I did not explain this in the original post and made a boo boo. That is what I have E&O for. :lol: :lol: But your point is true to form and I find that most people (Realtors/Loan Officers) use the $ per sf to much and don't understand the reality of what it shows.

Ryan

:roll:

 

[Austin]

Pam wrote:

“It only starts to make sense after everything else is adjusted for. The larger the GLA, the smaller the $ per SF.”

Pam, you just answered your own question without realizing it. That quote tells it all. Your first sentence is absolutely correct. You have hit on the fact that the sequence of adjustments presently used is totally incorrect and pointed out the fact that if the correct sequence of adjustments is not used, you get the wrong answer.
Your second sentence is also absolutely correct. You just pointed out the fact that GLA correlates with sale price without realizing it or in other words-the most significant adjustment is a correctly performed size adjustment using the proper sequence of adjustments. The point is that nothing makes any sense until you adjust for everything else first then do a mathematically correct size adjustment. The only time I use $ per square foot is to graph the $ per square foot vs GLA to show that value influencing factors have all been accounted for.
To me when I hear some one, especially a Realtor, start talking about $ per square foot, that is a sign that they have no idea what they are talking about. $’s per square foot are only significant on a graph after all other adjustments are made and generally are meaningless outside the data set at hand.
Tell your Realtor friends that $’s per square foot are inversely proportional to GLA and that in a properly performed marketing grid using the correct sequence of adjustments results in a linear trend line when GLA is plotted against $ per square foot. That will get them off your back.

 

[The Bob]

This is classic example of the old saying "a little knowledge is a dangerous thing". I don't where these real-a-tors get this. I once had an agent compare a ranch with a full finished basement to one without using this method. Obviously the result was skewed to the upside. I guess the best retort you have is to explain that no legitimate appraiser would base is valuation solely on the price per sq ft.

 

[Restrain]

Just a note - the $/SF being smaller the larger the property, all things being similar is correct only to a point. In custom homes, the $/SF can be the same or more the larger it gets. This is because on typical homes, the plumbing is in place, etc. and the walls are just pushed out a bit. On the customs you can have whole wings, extensive interior amenities added, etc that can push it up. In typical appraising however, it can give you a guide as to quality (similar homes having $10/SF difference in sale price) or it can indicate a hidden amenity (pool added).

 

[Tim Hicks (Texas)]

Pam,

I would not let it bother you. They will dissect your cost approach next. My favorite comment is usually with regard to the living area cost to build that they confuse with the overall price per foot. They really look ridiculous when you explain that if you divide the bottom number in the cost approach by the living area, they will arrive at a price per foot around typical for the market.

Just explain that you do not have the time to teach a condensed appraisal class and they should invest in one soon before they embarrass themselves. Or, you can offer them a personal appraisal principles class for $200 an hour.

Oh, don't forget the reason that the price per foot goes down as the size of the home goes up because the home size is changing, but the lot and site improvements are a set value that does not increase unless they are superior.