I have seen buyers try to use the price per square foot to figure out how much their home is worth or how much to offer on a home. Although price per square foot can be a good way to tract an area on pricing trends, it is a poor way to price a home for the following reasons.
1. Amount of Land .
I had a call last week in the office on a piece of country property. After telling the prospect about the home and land, he asked for the price per square foot and then commented that it was too high based on the price per square foot. He did not take into consideration the lot size and all of the other buildings on this horse property.
2. Condition.
Not all homes in our market are in the same condition. We have blinged out homes and many distressed homes in need of a lot of work. Price per sqaure foot lumps them all together. Improvements in our market are at a discount (example: Pool that costs $40,000 to install may only add $10,000-$15,000 to the sales price) but they still do add value.
3. As the square feet for a home goes up, the price per square foot goes down.
It is called the Law of Diminishing Returns. As you get more of something, each additional something is worth less than the one before it. Here is an example.
If you are in the desert without water and someone comes along selling water, how much would you pay for that first bottle. Depending on how thirsty you are, probably a lot. This may go on for the first few bottles. As you quench your thirst, would you still pay as much for the 100th bottle as you did the first. Probably not.
The same thing happens with real estate. Once your basic needs are met, say a 2000 square foot home, the amount you are willing to pay for each additional foot will be less.
So how do you price a home?
Ask your agent to see what similar homes in THAT neighborhood have SOLD for. That will get you heading in the right direction and keep you from getting tripped up.
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