Why not $psf?

[Bill_FL]

Reading the ask an appraiser section, it seems that most of the general public and most of the RE agents relate $psf to their homes. Why don’t we? One of the responses given by an appraiser was:

It is interesting that you referred to the price of your property by square foot. Real Estate is not a comodity, you don't buy it by the pound like potatos. You buy it at a price arrived at in relation to other properties in the market area.

You didn't mention your lot. Is it smaller or larger than others in your neighborhood? How about the terrain? Is it on a busy street? Is it located near some negative influence like a gas station or sewage pump house?

Lastly did you consider other properties currently on the market. An appraiser will not generally estimate the value of your property higher than the list prices of other, similar properties in your market area.

It is obvious that this appraiser has not done much commercial work, where the $psf is a common unit of comparison. Why is it that most don’t understand that you can adjust the $psf in the same way one would adjust the sales price? But to me, the bigger question is why we do not use it, when it seems to overwhelmingly be the unit of comparison most commonly used by typical buyers, sellers and participants in the market?

 

[Greg Bell]

There is a reason FNMA eliminated the cost approach.Residential is not even close to Commercial appraising.If price per square foot was so spiffy we would just multiply the livable area and poof , instant appraisal., hey that sounds great...

 

[c w d]

Because we break down the price/sqft into the constituent components that make up that price and adjust to reflect those difference.

 

[Michigan CG]

People do buy homes based on square footage, they may not know it but they do. Size is not the only factor, but it is a main factor.

When looking at two similar houses people will notice the difference in size and it is a factor. They won't say "This kitchen is only 266 SF, the last house had a 300 SF kitchen", but the perceptions are there.

If size isn't the largest factor to buyers, then why is it the largest adjustment on most appraisals?

 

[Carnivore]

People do buy homes based on square footage, they may not know it but they do. Size is not the only factor, but it is a main factor.

When looking at two similar houses people will notice the difference in size and it is a factor. They won't say "This kitchen is only 266 SF, the last house had a 300 SF kitchen", but the perceptions are there.

If size isn't the largest factor to buyers, then why is it the largest adjustment on most appraisals?

Tim,

Your correct they do that because they have been conditioned for it over the years. It is soemthing they can hold onto and use later at the homes to make decisions. In my area the MLS no longer gives exact SFT until it closes. While active they give a substantial range, ie! 1400-1900, 1900-2300, 900-1100, etc etc

 

[Bill_FL]

Because we break down the price/sqft into the constituent components that make up that price and adjust to reflect those difference.

So do commercial appraisers. When using the $psf as the unit of comparison, you simply adjust the elements of comparison on a $psf basis.

Example: House sells for $100 psf, site size differs, and you adust by -$1.00 psf, garage difference, +$0.50psf, etc. Rather than making dollar adjustments based on the sales price (as the unit of comparison) you make adjustments based on the sales price per sqaure foot (as the unit of comparison). The real fun would come when trying to explain how to adjust for square footage.

 

[Kali the Boston Terrier]

There is many schools of thought as to why commercial appraisers use a uniut of comparison. But in aparments and mini storage we value it as a $/unit, office $/Rentable GBA, $/Bedroom, etc. Typially those units of comparison result in the smallest standard deviation across the data set then the lump sum price. It also eliminates the size variance and allows comparison to much larger and smaller units of comparison because of the lack of data.

But in all the above situations they are purchased in a sterile commodity driven mode, apartments are valued in a $/Unit method because they are rented in a unit, and therefore there is a logical correlation between $/Unit and PGI/Unit. Offices $/Rentable GBA same thing, etc. I say sterile, but I really mean an environment with little emotional buying. Unlike residential, although $/SF may provide a test of reasonableness..it does not account for the other emotional issues associated with residential homes (i.e. color of carpeting, wallpaper, monthly payment, etc.).

The other argument is that in a regression analysis of residential, typically square foot has an R2 of no more than 60%, suggesting at the very least that only 60% of the model is explained by square foot, leaving nearly 40% of the value to be attributable to something else. In commercial and industrial the factor is much, much higher, suggesting that if you looked at nothing else but the $/SF you might actually be pretty close, unlike residential in which you would still have 40-50% more to explain the value.

But I do agree will Bill's OP to a certain degree, although I am not sure I would base my final opinion of value on $/SF, it should be analyzed as part of the report as a test of reasonableness.

 

[Thern Newbell]

I believe because it is such a prevalent consideration among agents and buyers and sellers, I believe that it is worthy of consideration in market analysis. I don't give a lot of weight to the price per square foot since it doesn't consider individual components, but I do address it when I feel it is appropriate. For instance, if in a given report, there are four comparables ranging in price per square foot between $90 and $100, and the appraised value falls above or below that range. Why does it fall above or below the range? It may be obvious to the appraiser, but not immediately obvious to the reader. This happens on the oddball properties that we encounter ever so often. Perhaps the house is the largest in the neighborhood, with no matching sales. Maybe there is an issue with economies of scale. A lot of times when I appraise a house that is so large that I could not find matching or superior sales, I have been able to note a trend among the sales where the price per square foot diminishes as the size increases. I would mention that in the report since there could be large variance in the subject's appraised value per square foot relative to the price per square foot of the comparables.

Price per square foot may also reasonable for consideration to check the validity of your final opinion of market value. If the subject fits the range of all of the comparables that were used in the analysis, one would anticipate that the price per square foot would fall within the range of the comparables. If it doesn't, I think some of the individual adjustments should be reviewed.

There is also price per square foot method that can be applied that analyzes the affect on price per square foot of individual components.

Since in an appraisal we are trying to predict the market response to a given property, based on past trends we should give consideration to how the market makes decisions, shouldn't we? I believe that we do become so "form-centric" that if it isn't on the form, some of us believe that it is not relevant. I heard an embarrasing comment in a local newspaper from a local appraiser who was asked for input on an article for landscaping. His comment was since it is not on our appraisal form, we don't consider it in the valuation of the property (I could not find the exact quote, so this is the gist of what was said).

 

[The Warrior Monk]

$/PSF comparison can be used in residential appraising as in commercial appraising. If the market values properties this way, obviously the appraiser should consider it also.

This type of comparison works best when the property is improved to its HBU and location is uniform. Examples would be condos/coops, especially in urban areas. It typically does not work well when the lot, unit, and location are not uniform...that goes for commercial as well as residential property.

 

[Caterina Platt]

When I do a simple paired sales analysis for a feature - after considering the living area size difference - you end up with a particular dollar amount. Say $10,000 for a view of the city/valley. Let's assume we have some other supporting data like a vacant lot sales pair that showed the difference between the view and the non-view at $11,000. Still pretty indicative of the view premium and it had not a thing to do with the size of the house. If you're dealing with the view lot and a 1,200 sf house, your view is theorized to add $8.33/SF. Nifty, but what happens when my subject is a 1,600 SF house? The view doesn't necessarily increase to $13,300.

Now you have to start fooling around with tempering your per square foot adjustment between sizes of dwellings. Personally, I think that just dilutes the accuracy of your work as you make more and more assumptions or conversions. The lot size, garage, view, location, etc. are attributes independent of the size of the home and should be treated as such.

Were residential real estate more tied to rental rates and rates based on size, you might have more of a true market trend. Being a residential only, and having just a minimal grasp of commerical, I'm probably not the best person to explain why this same trend would work in commercial, but I'd venture to guess it's because the residential market is far less tied to income and returns on a rental per square foot basis.