If the lot of the home you are comparing with is smaller than the lot with the home you are looking to determine value for, the price per square foot doesn’t allow you to accommodate for the difference in land size. To the extreme of this problem, there is no consideration for views, steep slopes, fenced yard, out-buildings, garden spaces, green belts or other features. Unless the lot size and the features are very similar or you know how to adjust for the difference, avoid using cost per square foot to determine value.
The best visual for finish level can be illustrated by comparing an older single wide manufactured home next to a new yacht. Even through the square footage of these two living structures might be exactly the same; you’ d be hard pressed to find anyone that would consider the two homes as comparable properties.
Square footage doesn’t give any consideration to the number of bathrooms, size of the kitchen or mill-work throughout the home. Certainly a home with granite counter-tops, boxed beam ceilings, wood-warped windows, a gourmet kitchen and a an extra bathroom will be worth more than a home without these features of exactly the same size. Unless the trim level of the homes are very similar or you know how to adjust for the difference, avoid using cost per square foot to determine value.
When you hear the term “at-grade”, that is the part of the home that is close to the ground level of the home, typically without stairs going up or down. Many home buyers will indicate a preference for a “Rambler” or “Ranch style” home. It is without exception the most desired style of home on the market, it is also the most expensive. And interestingly enough, the reason it the most expensive has less to do with demand than the cost of construction.
Think about it this way, if you are a builder and you have a piece of land you will want to build a home that will make you the most profit. Since the value of the land is a sunk cost, now the considerations are style of home and size of the home. If you build a one-level home, you will build a home that many buyers want but it won’t be very big. You can double the size if you add a story and by doing so you only have to pour one foundation and build one roof. Considering the land, the foundation and the roof are some of the biggest costs in building you’ve effectively doubled the size of the home without doubling the cost.
Back to square footage calculations, unless the homes you are comparing have the same grade or you know how to adjust for the difference, avoid using cost per square foot to determine the value of the home.
If I need a three bedroom home, it doesn’t matter that a two bedroom is available for the same price per square foot. If I need a home with a space for an office, it doesn’t matter that a home without a den is the same price per square foot. Most home buyers approach the housing market with some basic needs, say a three bedroom two bath home with a garage. They might feel they need a home that is at least X square foot or they may say, I don’t want anything bigger than X square feet. Rarely does a home buyer search only on the basis of square footage. Unless the homes you are comparing have similar use or you know how to adjust for the difference, avoid using cost per square foot to determine the value of the home.
A home with a garage is going to sell for more than a home without a garage. And a home with a two car garage will sell for more than a home with a one car garage. Since square footage only counts livable square footage, features such as garages or covered patios are completely disregarding in the calculation. Unless the homes you are comparing have similar garage and outbuildings or you know how to adjust for the difference, avoid using cost per square foot to determine the value of the home.
When comparing new construction from one builder to the next within the same community; provided the lot size and finish level are similar between the two homes and.
When comparing condominiums in the same building with the same number of bedrooms and bathrooms and same finish level.
When an appraiser who has the proper training on making calculations for the differences in all the above categories is utilized.