It seems that I spend a lot of time talking with clients, and prospective clients, about price per square foot.
Longtime readers – and viewers of my YouTube channel – may note that in my real estate market reports I often cite price per square foot as a number to pay attention to.
But my clients and I tend to look at it from different perspectives. When I look at price per square foot, I look at it in the aggregate. For example, I will often say that the average price per square foot of all homes sold in a given county in a month was $763, versus $797 in the year-ago period. I tend to use it as another way of measuring market appreciation or depreciation.
This week, I had an email discussion with a gentleman with whom I’ve been corresponding about his home’s value since about 2015. He said another Realtor had told him that homes in his neighborhood all sell over $1,000 per square foot, which he took to mean that his home must be worth at least $2.45M, because it was 2,450sf.
Unfortunately, that’s not really true. For starters, homes in his neighborhood do not all sell for over $1,000 per square foot. I dug into the most recent sales in his specific neighborhood (an enclave of newer, somewhat larger-than-average homes bordered by a greenbelt) and showed him that none of the three most recent sales had been over $1,000 a square foot, but instead had ranged between $839 and $963 per square foot.
But what is true is that in fact, many homes in the area right around that man’s home do, in fact, sell for over $1,000/sf. Which homes are those?
Smaller, crappier, older homes.
Say what? Older, crappier, smaller homes sell for more on a price per square foot basis compared to larger, newer, better-kept homes?
Surprise! Yes, it’s often true. There are a couple of reasons for that. The first is that price per square foot in no way accounts for the value of the land. In the greater Bay Area, lot value often accounts for 50-65% of the total value of the real estate.
The second reason is that the first square foot of the house to be built costs much, much more than the last square foot to be built.
Consider this: let’s say you wanted to build a 1,000 square foot house, and the developer told you that the whole project from start to finish, including the lot, would cost $500K. But then you decided you wanted to double the size by putting a second story on it. Would your project cost jump from $500K to $1M because the square footage had doubled?
Hardly. You already have the land, driveway, and a foundation. You already have the roof….and the utilities, fencing, landscaping, HVAC, solar, permitting fees, etc. are going to be nearly the same. And you wouldn’t be adding a second kitchen (the most expensive room in the house).
You’d probably find that adding the second story might only cost you about 50% of the cost of the first story. Here are the numbers you might be looking at:
Single Story 1,000sf
$500K Cost – $500/sf
Two Story 2,000sf
$750K Cost – $375/sf
And that helps to explain why when older homes are torn down, the new home the replaces it is almost invariably larger, because the home gets cheaper to build on a price per square foot basis the larger you build it.
So that begs the question…if you can’t figure out how much a home is worth based on price pre square foot…how do you know what a home is worth?
It turns out, that’s easy! Just give me a call. I’ll be happy to take a look at your home and give you a detailed market analysis at no cost or obligation. What’s more, I’ll tell you what it’s worth right now, as-is, and what can be done cost-effectively boost your home’s value for resale.