I'm with Brad. The price/SqFt indicator is measuring the aggregate of the structure and the site. If there are two homes of different sizes, side by side on the same size lots, they will have different price/SqFt indicators. Even if the quality and condition of the improvements are the same. Reason being that the contributory value of the site has a bigger impact on the price/SqFt indicator for the smaller home.
This is really apparent when appraising apartment properties. The example I always use when explaining this is the hypothetical matched pair analysis using the same sized lots, side by side in the same neighborhood. Both have the same zoning, but one of the lots has a 1,000 SqFt duplex and the other has a 1,500 SqFt triplex. The units being built by the same builder, same 1-bd unit floorplans and unit sizes, same quality, condition, parking, etc. Setting aside the possibility of different types of buyers (owner-user vs. investors) and the economy of scale considerations, these two properties will result in very different price indicators. The reason is that those price indicators for the structures include the pro-rata share of the site. The duplex property only divides the site cost/value by two units, whereas the triplex divides by three units. Ergo, the triplex property will almost always have lower indicators, the only exceptions possibly being very high-demand areas like a beach community or ski resorts. The lot utility is being utilized differently by these structures. Incidentally, this is the reason that it can be very misleading to compare value indicators for small apartment properties of different unit counts to each other. How many times are we handed duplex sales data as 'comps' for our 4-plex properties? How the sales agents here love to refer to apartment comps as "Price per Door", apparently not realizing that not all 'doors' are created alike. Invariably, the properties with more 1-bd or studio units have more value issues than the properties with more 2-bd and 3-bd units.
Then, as Brad and others have stated, there is the economy of scale thing. The 1,000 SqFt home and the 1,400 SqFt home will have different cost indicators because most, if not all, of the extra building area will be either living/family room area or bedroom area, both of which are much less expensive to build on a cost/SqFt basis than the more labor and material intensive kitchen and bath rooms. That, and the indirect costs, fees and permits, site costs, "other improvements (garage, site improvements, etc) are all dividided by the different sizes of the main structures. This is the same reason that we rarely use the Cost/SqFt from the Cost Approach as the adjustment for size in the Sales Comparison.
The main reason we rely more on price/SqFt on non-residential properties is because those properties are less homogenous and have a much lower quantity of highly comparable data than residential properties. If I'm appraising a new industrial building in a developing industrial park, all the buildings being of very similar size, my value opinions would come out the same no matter which unit of comparison I use; price/SqFt of the building, price/SqFt of improved lot area, sale price (a la SFRs), etc. Matter of fact, I sometime use the sale price itself as the unit of comparison for certain non-res property types here, such as highly improved contractor yards or car sales lots. Adjust separately for the differences in lot size and building area, then make adjustments for quality, condition, etc. It's not pretty, but then again, it's sometimes the only way these sales relate to each other.
Apples to apples. Like to like. The less similar the comparables are, the uglier the analysis gets.
George Hatch
