Price Per Square Foot

[Smokehouse]

I have a question. I did an appraisal for a FSBO the other day. As soon as I began doing the preliminary research I saw that there was going to be a value problem The house was selling for 230,000.

The neighborhood is very well defined and consists of about 5 streets and maybe 150 homes. There were probably 8-10 comparables within the last year that have sold.

It is in a popular area in town, but the highest sale was 205,000 (across the street). There was one sale foe 220,000 but it was about 6oosqft bigger. I asked the homeowner how they determined the asking price and she said that the average price per sqft was 144.00/sqft or something to that effect.

I knew that is how FSBO's always do their pricing so I went with the tax records going back 1 year and did the whole price per sq ft thing and said I got 120/sqft.
What is this theory behind price per sq ft. I tried to explain that the price per sqft is a very general way but doenst take into account any differences in homes and that it is not a linear measurement, bigger houses dont have higher ppsq just because they are bigger. Is there a better way to explain this to people, I get it from Realtors as well. Or am I way off base.
Thanks in advance

 

[Mike Garrett RAA]

Yes, .....price per square foot is a component of an appraisal, not an appraisal. That is what you pay me the big bucks for. Then smile

 

[Smokehouse]

I'm supposed to be getting paid the big bucks ???

 

[Tawfik Ahdab]

Mike said it eloquently in the least number of words possible.

 

[Smokehouse]

Yeah, I was hoping for a bit more though hehe

 

[Randolph Kinney]

You could explain that after you make adjustments for things like lot size differences, location (cul-de-sac versus busy street), view, upgrades, condition, bathroom count differences, GLA differences, functional utility differences, differences in amenities, etc., you might arrive at a price that has some meaning for comparison to another home.

Simply taking the sales price and dividing it by the home's GLA does not give a meaningful number for sales comparison because it ignores all salient differences among comparables.

 

[larryhaskell]

The price per square foot method of establishing a list/sale price is a tool utilized by many residential real estate professionals to mislead the public. Apparently it still works. Price per square foot certainly has a place in real estate such as when marketing vacant land for commercial or industrial properties.

 

[Don Jones]

Tell them considering only price per sq. ft. for pricing residential properties, or other types of real estate, is no better than selling/buying a vehicle by the pound. Same principle applies.

 

[Austin]

This is another version of the GLA size adjustment debate that has been running for the last week. This happens all the time with Realtors using that method. What they are doing is using a method predicated on a linear trend line with a positive slope. Any time I see a large older home with like 4,000 sf of GLA and a Realtor was involved, I want to get in the car and leave the crime scene because I know what is coming down. They did what you just said and grossly over priced the property.
Here is the way I handle this. Get comp sales and graph the GLA vs sale prices. In large older houses you will find that the trend line is either level (zero slope) or has a negative slope meaning you adjust down for size or no adjustment at all. This means that size is not a factor or is a negative adjustment. Typically the significant factor in this type home is property condition, which is a function of renovation over time. If you use the price per sf method of adjusting for size all you are doing is making a voodoo adjustment that analysis of the data will clearly indicate is not rational.
If you get a chance go and read that thread on GLA size adjustments. That is the very point I tried to get across with the method I suggested. If you use my suggested method and analyze the data you will not get caught in that trap.

 

[Elliott]

Its always hard to explain a single value indicator in relation to a process.
The appraisal process is essentially a grid analysis which first
selects the most comparable properties in location, age, condition,
and living area. One component of that analysis is an adjustment
per square foot....however, developing a value based solely on gross
sales price per square foot is seldom considered appropriate or
reliable (though AVMs love it). Other things equal, smaller homes
tend to sell for a higher price per square foot than larger homes.

How's that?

elliott