How important is price per square foot when buying real estate?

Home buyers, sellers and real estate agents like to banter about price per square foot when comparing homes and estimating their value. It is an easy number to calculate and an easy concept to grasp. But how valuable is the figure when valuing a single, unique property? The short answer is that it is only somewhat valuable. If you are going to use this metric in the home buying (or selling) process, you need to be aware of its limitations and pitfalls. You need to question the accuracy of the data being presented, account for the uniqueness in each piece of real estate, and be sure that you are comparing very similar properties in the process. Looking at an average price per square foot for a neighborhood and then multiplying for the home you are looking at is likely NOT a reliable way to figure its true market value.

A sample floor plan for a single-family home

Who measures the square footage of a home?

I have yet to meet a home seller who has actually measured the square footage of their home. Real estate agents will almost never measure a home themselves, as it opens up a huge liability if they misrepresent the correct square footage, even inadvertently. Most square footage numbers are sourced from a previous listing, a recent appraisal, county tax records, or a floor plan originally provided by the builder.

Different regions of the country and different MLS’s may have different ways of displaying square footage. In Western Washington, the Northwest MLS sets the guidelines. Your local MLS may behave differently. As listing agents, we are supposed to enter the Approximate Square Footage for every listing. The Approximate Square Footage is the total of both finished and unfinished “living area”. The living area can be above or below grade, and does NOT include the garage. It also doesn’t include any non-contiguous or unheated areas. For example, a one story home has 1000 sq ft on the main level, 700 sq ft of unfinished basement and a 300 sq ft garage in the remainder of the basement. The square footage should be listed at 1700 sq ft in this example. Our MLS has a separate area to mention the breakdown of finished versus unfinished square footage as well, but it is optional.

Is the square footage accurate?

Square footage data is often littered with inaccuracies, so beware. Most notorious are older homes that may have been remodeled or expanded over the years. Records from the county tax assessor may be based on the original size of the home and fail to report the remodeling over the years. There is not a great mechanism for the government to keep accurate records of these changes, and data entry errors are common when transcribing from century-old records.

There is a specific methodology for measuring square footage, and it is relatively straightforward for rectangular homes with an easily-measured footprint. (Exterior measurements are most commonly used, and wall thicknesses are included in the calculations.) Many homes have difficult to measure spaces that can easily cause mistakes. For rooms with sloped ceilings, you need to account for the actual “usable” space. Bay windows and circular floor plans may add challenging measurements. Open areas and staircase openings need to be deducted from the upper floor. You get the idea.

Home building is imprecise by its nature. Architects create precise drawings that are translated in the field during the building of a home. Building materials and craftsmen are imperfect and may improvise and “shim” their way to a close approximation of the architect’s drawing. These “as-built” imperfections do materially impact the overall square footage, so the home may have deviations from the area measured in the original floor plan.

Is the square footage believable?

Agents and sellers often misstate the square footage of a home. Sometimes it is intentional deception and sometimes it is not. Just today I came across a home that under-reported its square footage by 700 sq ft because they didn’t include the unfinished basement. Another home overstated it by including the garage. Other times there is no square footage listed at all. Perhaps the sources of data are known to be inaccurate and no one wants to step up and provide an accurate measurement. It pays to be skeptical of square footage data.

Is price per square foot a meaningful comparison for homes?

Sometimes price per square foot is meaningful, and sometimes it is useless. It does have value when comparing similarly-sized and similarly-configured homes in a very specific area, giving general trends for the neighborhood. It is nearly useless when comparing smaller and larger homes, since smaller homes tend to command a higher price per square foot than larger homes. It is also useless in the face of unique features like views, busy streets, premium lots, property condition, etc., that may vary from house to house.

The mathematicians out there will simply say “This neighborhood is averaging $200/sq ft for sold homes. This home is 2500 sq ft, so the value is naturally $500,000. The 2000 sq ft home next door should be worth $400,000. ” Home buyers and the real estate market simply do not function that way. Maybe the floor plan of the 2500 sq ft home is awkward with lots of unusable space compared to the 2000 sq ft home, or maybe the smaller home has outstanding views or really cool finishes. A smaller 4-bedroom home may have considerably more value than a 3-bedroom home with very large rooms. In these instances the smaller home can be worth the same or more than the larger home. Huge differences in square footage do result in value difference, but moderate differences are easily overwhelmed by other factors like floor plan usability, available light and bedroom/bath configuration. I can’t tell you how many times we have come across 3000 sq ft homes that are loaded with extraneous and unusable spaces, while a smaller 2500 sq ft home is far more appealing with the same general configuration. Simply using $/sq ft averages is not going to get you to the answer for market value.

Can price per square foot be used for building costs?

When building a home, it can provide a useful gauge of construction costs. Home construction requires building materials and labor, and it is a safe assumption that by adding square footage, you are proportionally adding to the costs of building materials and labor to assemble them. Builders often use these figures to estimate construction costs on new projects, based on their recent history. There are many factors that work against this calculation that need to be accounted for. A fancy kitchen may cost $50,000 to construct, while an empty bonus room of the same size may only cost $5,000. A tiny bathroom with elaborate finishes may add $25,000 to the bill, while contributing very little to the overall square footage. Let’s say you are building two 4000 sq ft homes with identical exteriors and footprints. The first home has 1 kitchen and 3 bathrooms. The second home has 2 kitchens and 4 bathrooms. Price per square foot will definitely be higher for the second home in this example, even though the homes are exactly the same size with the exact same finish levels.

How should I value a home?

Estimating the value of a home is more complex than using average $/sq ft. You need to account for the unique characteristics of each individual piece of property and either credit or debit the value of the property as appropriate, based on recent sales of similar homes. Size of the home is important, but you absolutely must account for factors like finishes, layout, location and style. Price per square foot is simply a rough gauge to point you in the right direction.