As a Real Estate Agent, value per square foot is how you determine listing prices...right? Not so fast!
As an Appraiser I do not even look at the price per square foot until AFTER I have determined the value of the Subject property; which is determined by who? Not the Appraiser but the MARKET. After I have determined the value of the Subject, if price per square foot is way off from the other sales then I must look at other contributory factors causing this number to be off. This is a complex problem that is for the Appraiser to decide.
So what do YOU do as a Real Estate Agent?
First some basic math:
1. Sales Price / Square Footage = price per square foot.
Example: You have a $200,000 sales price with 1,800 square feet which equal $111.11 per square foot value. Did you check my math? GOOD, I wanted you to do that!
While the sample above seems quite easy, the problem lies in what ELSE is considered in price per square foot?
The lot value, the quality, condition, basement size and finish, out buildings, pools, etc. All of these are considered in the price per square foot.
So where is the PROBLEM?
Unless you are dealing with a "cookie cutter" home in a development where all the lots are basically the same size and same value and the homes are similar in square footage and quality, using price per square foot to SET your listing price is a mistake without further work needed!
If you are dealing with Lakefront property, price per square foot flies right out of the window because the land or site value is in many cases the lions share of the total value. Same holds true if you are dealing with Acreage, Golf Course homes or homes with mountain, river or other water views.
So what do you do in order to set price? You must FIRST and foremost determine the value of the LAND or DIRT that the home sits on. This is crucial. Then compare that to the other comparable sales you are reviewing and their lot values. Once you subtract the site values from these sales, you can deal with the remainder of what the property offers. Hopefully you are working with homes that are at least close in size, quality and condition, otherwise you have to extract those values from the other sales to make them EQUAL to your Subject property. A much more involved process and that is where an appraisal comes in handy!
Once you subtract that land value from the total Sales price using the sample above, if the lot is worth $40,000 you now have a working number of $160,000 for the home ($200,000 - $40,000). Now divide the total adjusted sales price of $160,000 by the 1,800 S.F. and you get $88.88 per square foot for the home or improvements to the site as Appraisers call them.
That number is the true MARKET VALUE per square foot for this home. When you review the appraisal report their adjustments for square footage variances, should approximate this number, assuming you have subtracted all other factors about the improvements which could rise that number unduly, such as outbuildings, barns, pools, etc.
Remember we are NOT talking Cost to build per square foot since the market typically does not pay the FULL price per square foot on resale homes.
The process above is a very BASIC, but workable approach for you to set the price per square foot for the home you want to list.
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When you do not want to deal with this process, call us or your local Appraiser for a Pre-Listing Appraisal. This makes yours and your sellers lives alot easier! This also takes the pressure off you as an Agent to come up with a good listing price for a home which is solid and realistic.
Have a great Holiday Season!