Pricing Homes On a Per Square Foot Basis
My Disclaimer: What you will read below is our company philosophy on pricing our listings. I'm not giving away any secrets. We stand behind the listed price of any property we have and will gladly share our analysis with any prospective buyer or their Realtor. I'm not an appraiser, nor do I care to be. Realtors have to arrive at a value, and bring two parties together on a contract and close it. Appraisers only have to bless it. I would bet if we went back and checked, 90% of the final third party appraisals on our listings came in either at or within about $2,000 of the negotiated contract price. Does that mean we are unbelievably good at pricing our homes or does it mean appraisers try to hit a value they know two parties have arrived at?
One other note ... You can ask three appraisers to go out an measure a home and will probably get three different total square footages. Why? I have watched them measure a home and it is nothing more than pulling a tape from corner to corner including all of the angles to measure every exterior wall. They then plug it in to their software and come up with what is called a table sketch. Sounds easy, but remember when you pull a tape, you are usually doing it over bushes because you cannot lay it on the ground. The small length walls are not a big deal, but when you get to longer exterior walls, the measuring tape is going to sag. And when the tape sags, the incorrect dimension is going to have a bearing on the final total square footage calculation.
Differences in the calculations of square footage may also exist among appraisers due to varying methods of handling common features such as stairwells, second floors, garage areas, or additions, as well as varying methods in the rounding of measurements. Square footage calculations are simply estimates and not cast in stone.
Every home that is financed is measured by the lender's appraiser prior to closing. If the square footage on that table sketch ends up less than what is reported on the tax rolls, a buyer is probably not going to get anywhere asking the seller to reduce the sale price. The sellers and their Realtors have priced the property as an entire package, land, pool (if any), deck (if any), out buildings (if any), landscaping, etc. And as Realtors, we use the best information we have available to us, which is usually the tax rolls, or even better an appraisal with a table sketch.
What "Price Per Square Foot" Means
Pricing a home by using a per square foot (psf) value is nothing more than dividing the total value of the property by the total air conditioned square feet of the home. You cannot include the garage or add-on space if they are not heated, air-conditioned, and used as living space. Technically, you are not supposed to include the square footage in an upstairs garage apartment or attached living quarters if you have to walk through an unair-conditioned garage or breezeway to get to them. I've always thought this was absurd, but that's the way it is. Anyway, if a home sold for $1 million and is 5,000 sf in size, it had a sale price of $200/sf. The price psf also includes the land the home is sitting on. I'll talk about making adjustments for larger acreages a bit later.
Using the price per square foot method of valuing a home can be risky. It can result in a severely over or under-priced home, both of which will hurt your seller. It requires a lot of thought, the ability to reason and extrapolate, and most importantly, a thorough knowledge of the homes that have already sold in the area. This is why we make it a priority to preview the listed homes in our areas of specialty (Murphy, Lucas, Parker, Allen, and Fairview) every week. How can we possibly price our homes if we don't see what the competition is offering?
Although pricing on a psf basis is an easy concept to understand, it can be wrought with traps, especially in custom home areas where no two are alike. And if the custom homes are also on acreage, it becomes even more difficult. Not only are no two custom homes alike, it is rare to find two custom home lots that are exactly alike. Even lots tend to have their own subtle differences. This is where the ability to extrapolate is critical.
How We Do It
We start virtually every opinion of value by first looking at all of the actual sale prices per square foot on surrounding homes. Notice I highlighted the words "sale prices". Some Realtors will use "listed prices" to establish values, but we don't even look at them. Listed prices are like a car dealer's MSRP. The bottom-line for pricing a home should never be what other sellers want for their homes, but what buyers have already paid for homes in the area. This can be a challenge when you are working an area with relatively low turnover (like Fairview, Lucas, and Parker), so this is when a good Realtor has to really rely on their instincts and experience rather than hard comparables.
Using the confirmed sale prices psf of surrounding homes helps us establish a range. It brings all of the homes to a common denominator, the psf value. For instance, if we are asked to price a home in Fairview built in 1992 with a pool and one acre lot, we will go to the MLS and run a search using those parameters. If 7 homes come up starting at $110/sf and the highest home selling at $123/sf, we have a general range to work with. If the seller wants to list his home for $140/sf, we might have a pricing problem. Is the seller right in thinking his home will bring substantially more than any other home sale reported to the MLS? He could be, but we have to convince ourselves that there is something about that home which makes it substantially more valuable than the others. If we cannot justify the price in our minds, we will politely pass on the listing opportunity and let the next Realtor take it. This is one of the biggest differences between Realtors who just list homes and Realtors who sell their listings.
So why not just average the total sale prices of all of the homes in the area rather than averaging their psf sale prices? Bad idea! If you do that, you have lost your common denominator. Here's a hypothetical scenario. Let's say you are ready to sell a home you bought two years ago for $500,000. It is 5,000 sf in size which means you paid $100/sf for it. Your Realtor pulls up another home in the neighborhood which just sold for $600,000. That sounds pretty good, but what if that home was 7,000 sf in size? That means it sold for $85.71/sf? Why would you want to compare your home, which you paid $100/sf for, with another home that sold for $85.71/sf? Either you paid too much for your home or the other home is not a good comparable.
Making Adjustments for the Size of the home
Just as a large tract of land invariably has a lower price per acre than a small tract of land, a larger home (all things being equal) will usually have a lower price psf than a smaller home. Is this a fact set in stone? No, but I'll bet dollars to donuts if you see two homes of similar finishout quality sitting next to each other on identical lots, where one is 5,000 sf and the other is 3,000 sf, the 5,000 sf home will sell for a substantially reduced price psf.
You have to take the sizes of the comparable homes into consideration when you are trying to establish a value. If you don't make that adjustment, you are probably going to have either a large home which is priced too high or a smaller home which is priced too low. And neither is a good thing for your seller.
Making Adjustments for the Lot
Quite often we have to make adjustments on the price of a home due to the lot. We recognize that a heavily wooded lot is always going to bring a premium and that should be reflected in the total sale price. The most popular request from prospective buyers has always been for a home on a wooded lot. In this part of Texas, trees are king. A wooded lot can easily sell for twice as much as a lot without trees because they are so rare. It is a matter of supply and demand.
Another pricing adjustment we often make is if our property is on a larger than standard lot. We might be selling a home in a subdivision on three acres when the standard sized lot is 1 acre. We could very well not find one single comparable for a home sale on 3 acres, but there might be 8 home sales on one acre. This is when we have to extrapolate. The first thing we do is come up with the value of the home on one acre from the comparables we have. We then add in the value of the extra 2 acres. Sounds easy, but it isn't.
Coming up with a value for the excess land on a home within a subdivision is tricky. If too much value is given to the additional land, the Realtor (or his seller) has priced the home out of the market and it will sit there forever. Remember, although having extra land around your home is a very nice luxury, but people live in the home, not on the lot. Buyers will only go so high before they start thinking "If I'm going to spend this much, I'll just go buy such and such home with nicer, newer features on a smaller lot". We try to educate sellers that their extra land, while certainly adding excellent value to their home, can be as much a handicap to selling their home as a benefit if it is overvalued.
So there it is. If I can leave you with only one thought, just remember, when a Realtor prices your home it all comes down to ...
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their experience
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their appreciation of the qualities of your home
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and knowledge of your market!
Tom Grisak Estate Homes Realtors, Inc - Texas License # 0329533
Your Realtors for Allentexas, Fairviewtexas, Lucastexas, McKinneytexas, Murphytexas, and Parkertexas 51602