Price Per Square Foot

[Ramon Tate]

Originally posted by Kendall Bryan@Apr 13 2005, 10:56 AM
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.

....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.

....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.

I understand you're just trying to keep a good relationship with the client and some here might advise you to just not worry about it. Do your appraisal and move on. Given the findings of your own research, I'd be VERY curious about precisely WHERE and HOW they got their "average" figure - if indeed it was an "average". Any special/unique/atypical features in or about the house that may have been the source for the buyer being willing to pay that price? In the absence of sales in the neighborhood at that level for say... 3 years back, why would a purchaser suddenly be willing to be nearly 10% higher on the total price, 17% on unit?

Brokers should and do know better. They're just trying to rattle your cage. Remember, Realtors are first and foremost SALESPEOPLE. They're trying to sell you on something that would directly benefit their potential for income. "Come over to the dark side Luke...."

As for explaining to the layman.... they probably won't really be listening to you very well because what you'd be trying to explain is something they don't want to hear.

But, that being said here's my shot at the layman version... just explain that a s.f. rate is not an all-encompassing measure, and is only ONE potential consideration best used in comparing nearly identical properties. As the differences in properties increase, price per s.f. tends to become less and less relevant. The computed s.f. figure includes the value of plumbing, wiring, kitchen cabinets, the garage, etc. If another house is identical in every aspect except that it has a couple of hundred more square feet of floors, ceiling, and walls, not more bathrooms, not more kitchen cabinets, not more wiring, is it reasonable to believe that a potential buyer would price out that extra 200 s.f. using a figure that includes $ for more plumbing, more wiring, more kitchen cabinets, and more garage to figure the added value? That would be giving value to things that don't exist in that extra 200 s.f., or as we call it here... double-dippin.

 

[George Hatch]

Another thing is that Price/Sqft of GBA is an aggregate number that includes site value, and when they use this unadjusted value indicator without accounting for all the variables the margin of error practically exlodes. It's exactly like using the salesprice as the unit of comparison without considering the effect of the variables.

The way the residential forms use Salesprice as the unit of comparison is an aggregate also in that the salesprice includes all the components of the property. The difference is that we make adjustments to our unit of comparison for those variations, to arrive at an adjusted value indicator. If they did the same thing to the same degree with the price/SqFt indicator the results would come out the same.

 

[Tim Hicks (Texas)]

The way I try to 'splain it is that price per foot is not a good indicator of value. If you are in homogeneous neighborhood where most lots are the same size and same value, the lot value is a constant and the size is an invariable. The lot value ratio will be higher on the smaller homes thus having a higher price per foot. Conversely, the lot value ratio will be lower on the larger homes thus having a lower price per foot. Then there are many other factors that throw a wrench into the price per foot. Pools, lot size, remodeled homes, additional improvements, etc will all affect the price per foot of a home. So, unless you have several exact model matches on exact same lots, the price per foot is a poor indicator of value. That is why the appraisal report is not just a list all the sales and average the price per foot for all the sales.

 

[Smokehouse]

I'll tell you what is kind of funny though, when I got there she said that she got her "comparable" sales from the MLS, I asked her if she was a Realtor and she said no....just saavy. I knew I was in trouble then. The homes she used to comp her house were the highest sales in the area, well I should say, 1 in the immediate neighborhood and 4-5 outside the natural boundaries of the neighborhood. All of my comps were all part of the same subdivision, all built at the same time in the 1940-1942, and all within 3 streets of the subject, and one was across the street. The FSBO was using comps from a higher proced area of this neighborhood, where if her house was lifted up and placed about 1/2 a mile away, then yeah maybe 229,500. Unfortunately it is what it is.

I recently had a realtor selling a creekfront with access to the river property for 300'ish. I asked for her comps and they were all 750,000 and above and I thought if you think these are comparale then why in the h*l did you price it at 300,000. She wasnt even embarassed about it. Those comps went in my trunk, just cleaned out my car the other day.

It's amazing what you run into, makes it an even more interesting job.

KGB

 

[TEL2002]

Just did an MLS search in my school district for 2200 sqft homes. Found 6 sales. The prices per sqft are as follows:
62.27
92.47
92.68
97.68
99.55
300.41

Maybe if you had something like this printed out from your MLS and had it handy, you could say...see there is a lot more than the price per sqft to determine the value of a home.

 

[unloadit]

Realtors LOVE to use the PPSF method. I think they learn it in RE school or something. They are always throwing out PPSF figures at me. I HATE it. I wish they would concentrate on selling homes....while we can concentrate on appraising them.

Don't you love it when they fax over comps to you......99% of the time they are horrible comps.

Just my 2 cents.
Brian

 

[Blue1]

Ask 'em if they bought their car by the pound......or the sq.in......You can factor any attribute of a commodity you wish to come up with some kind of value; that doesn't mean it's accurate.