Square foot for the dollar is a very easy "tool" available when analyzing homes to buy or sell, but what does it really tell you? Make sure you understand this "tool" before you use it!
Make sure you compare idential quality! Square foot for the dollar analysis does not work when you are not analyzing identical units. If the two homes are not similar, that would be like buying metal by the pound without asking if you are buying gold or aluminum! There is a reason why both are metals and one is sold by the (troy) ounce and the other by the pound!
Location, Location, Location! If you only adjust for price for square foot, you missed one (three) of the basic principles of real estate. You need to adjust even within the same neighborhood due to views, lot orientation, neighbors, landscaping, etc.
Size matters! Make sure you understand "incremental price impacts" Let's oversimplify the math and assume a builder can build a 1,000 sq. ft. home in your town for $100,000 including the lot. The price per sq. ft. is easily calculated to be $100 a sq. ft. Therefore, to add a 200 sq. ft. family room, it would grow to a 1200 sq. ft. home of equal quality, just bigger so it should cost $120,000 right? WRONG! I will be writing a complete separate blog about this, but if you paid $25,000 for the lot, it was 25% of the price per sq. ft. originally you already know you are starting by paying 25% too much for the additional sq. ft. if they still charge you the same original rate. There are lots of other adjustments too which lower the incremental square foot increase pricing.
Quantity vs. Quality: A production builder can pay an architect once to draw out a floor plan and use it over and over again to cut costs. They can buy 100 of the same brand of appliances to get a better price than a custom builder. A production builder can get better pricing from their subcontractors because they know they have jobs lined up in the future and consistent work. They buy their lots in buik at better pricing. These economies of scale mean they can build the exact same home as another builder for less price per sq. ft. with absolutely no impact on quality! If however, you want your home to look unique - think of it as buying art and expect to pay more. How much harder do you think it is for a builder to build two of the exact same homes at the same time in the same community when they subcontract all the actual work? It doesn't take twice as long to schedule, or twice as long to buy materials, or twice as long to drive out to the job site, etc.!
A higher or lower price per square foot does not tell you the "value" of a home. It is just a tool! If other homes in the neighborhood are selling at $100 a sq. ft. and the one you are thinking about it $90 or $110, that isn't definitively good or bad, it is just a "red flag" Ask questions to find out if there is a good reason for the difference.
In America, there is a reason why our flag is Red, White and Blue. We have to offer a little something for everyone!
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