Purchasing a house can be a significant step and a huge investment. That’s why it’s essential to understand which elements affect the property’s value. One such element is the price per square foot, which measures the property’s purchase price considering its size.
In this article, we will go through what price per square foot is, how it’s calculated, and the factors that impact it. We’ll also discuss the benefits and challenges of using it and provide tips on integrating it into your home-buying process. Lastly, we’ll emphasize the need for working with a real estate agent to understand more about the price per square foot of properties.
Price per square foot is used mainly by people in the real estate industry to estimate the value of a property or house’s cost. They derived it by dividing the property’s price by its square foot area. Price per square foot area offers a way of comparing the costs of properties of different sizes and geographic locations.
Price per square foot area = Total price of the property / total square area
For instance, if the property costs $700,000 and the site is 3,500 square feet, the price per square foot will be $200 ($700,000/3,500 square ft).
A good understanding of price per square foot is important for buyers as it allows them to compare the cost of properties with different areas more accurately. Using the price per square foot, they can easily compare a property’s value in a high-end neighborhood and one in a lower-end community.
Furthermore, it’s a tool for identifying potential bargains or overpriced properties. If a property has a higher price per square foot than other properties in the area, it’s overpriced. The opposite also makes it a good bargain.
Price per square foot differs from one to another depending on various regional factors. Understanding these factors is vital so that homebuyers can make good purchasing decisions and estimate the cost of homes. These factors include the following.
Differences in cost of living and real estate prices vary widely between urban and rural areas. Homes for sale in urban areas usually have a higher price per square foot than those in rural areas. This is because the cost of living and property prices are generally higher in urban areas than in rural areas due to more demand for land. Rural areas have more available land for development.
Variations in property prices also vary based on neighborhood and location, such as proximity to city centers, coastal location, or desirable amenities. Properties in desirable areas, like being close to city centers, a good school district or with good amenities, like parks, have a higher square footage price.
Dissimilarities in home styles, building codes, and local zoning regulations have a big impact. Building codes and zoning regulations differ according to geographical location. This impacts the type of properties built in that area and their estimated value.
For example, places with stricter building codes, like the San Francisco Bay Area have a high price per square foot due to the higher quality of construction. Also, some architectural styles can be prevalent in some places and costly to construct, ultimately increasing the price per square foot.
Inequality in land and development costs, taxes, and insurance rates all vary between regions. Different areas have different land and development costs, taxes, and insurance rates.
This affects the overall price per square foot. Areas with higher taxes have a lower price per square foot due to higher ownership prices. Also, places with more expensive building materials and labor will lead to a higher square foot costs.
Effects of local economic conditions, such as unemployment and population growth, can change the average price of housing. Local economic conditions, such as unemployment and population growth, can affect the demand for particular houses while also affecting the price per square foot.
For example, areas with many available job opportunities and a higher population usually have a higher price per square foot because of more demand from homebuyers. On the other hand, places declining economically will have a lower square foot pricing due to having lesser demand for land there.
A good understanding of regional factors that affect a property’s price per square foot is essential when looking at properties. It also ensures that homebuyers pay the appropriate amount when buying any type of property.
Real estate agents widely use the price per square foot as a metric. Like any other thing, it has advantages and disadvantages that should be considered before using it. Advantages of using price per square foot include:
On the other hand, the disadvantages of using the price per square foot include the following:
One of the primary purposes of price per square foot is to compare properties. Using this standardized tool, real estate professionals can easily compare properties of various sizes, architectural styles, and geographical locations while doing real estate sales.
For example, if two similar properties are different in terms of dimensions, the price per square foot can be used to know whether the bigger property is appropriately priced compared to the smaller one.
Another use can be determining the market value of a property. Real estate professionals will evaluate the property’s market value by looking at the price per square foot of similar properties in the area.
Price per square foot is mainly used during negotiations. In a negotiation where a buyer is confused between two similar properties, they can bargain for a lower price. The seller can similarly also bargain for a higher one.
Additionally, it can be used to estimate renovation costs. Real estate professionals can estimate renovation costs per square foot by looking at the price per square foot of similar properties in the area.
Integrating price per square foot in your home search has been proven to be quite valuable. Here are some tips on how to do that:
In conclusion, price per square foot is a valuable tool for evaluating a property’s value based on size. It allows one to compare different properties, estimate their market value, and use them while negotiating. However, don’t forget about regional factors that affect the value of a property. It’s also essential to work with a real estate agent to have accurate information about the price per square foot and make proper decisions.
If you’re looking to buy a property, no matter if you’re after small condos or larger homes, look up for eXp properties you would like to purchase and sign up for alerts of new listings when they come on the housing market.
You can further contact a real estate agent that will guide you through the buying process by determining properties’ price per square foot and offering other needed information. By using these resources and working with a knowledgeable agent, you can make informed decisions and find a property that meets your needs and budget.
Price per square foot is paramount when estimating the value of a property. It further allows you to compare similar properties in the same neighborhood.
You can reduce the price per square foot by negotiating with the seller, buying houses in rural areas, choosing a smaller place, or reducing construction costs.
The rule of thumb for price per square foot differs in location, architectural type, and condition of the house. Generally, the price per square foot should be 10% of the area’s median price per square foot.
Price per square foot area = Total price of the property / total square area
For instance, if the property costs $700,000 and the site is 3,500 square feet, the price per square foot will be $200 ($700,000/3,500 square ft).
Price per square foot is beneficial but may not always be accurate. Regional differences like property features and upgrades can affect its accuracy.
When choosing between buying or building, you must factor in location, materials, and labor costs. Sometimes it’s cheaper to buy and sometimes to build, depending on the situation.
The price per buildable tool calculates the expense of building a new property. It factors in land, material, and labor costs.
The cheapest type of house to build per square foot depends on the location, property features, and property condition. Usually, simple and tiny houses are cheap to build.
Appraisers must consider many factors when estimating a property’s value, like the location, condition, and features. The price per square foot does not accurately reflect the property’s value. Therefore, appraisers cannot rely on it alone.
One of the easiest ways to determine whether a house is priced correctly—or figure out if it’s priced high or low in comparison to other homes—is to look at the price per square foot valuation. This figure is one of the ways you can make an apples-to-oranges comparison of properties easier to understand.
Christa Kenin, a real estate agent at Douglas Elliman, describes price per square foot as The Great Equalizer. “[Price per square foot] gives buyers a sense of where a listing sits relative to other listings on the market,” she says. “If a listing’s price per square foot is dramatically different than other similar homes on the market, it signals to buyers that the home may be priced too high or too low.”
So knowing price per square foot can help you get a better sense of the worth of a home, regardless of its specific size. Read on to learn how to calculate this number, why it’s important, and how you can use it to explore a home’s pricing.
How Price Per Square Foot Is Calculated
On its face, price per square foot is a simple calculation.
“To calculate the average price per square foot, simply divide your square footage by the purchase price,” says Carol Horton, chief marketing officer at Kindred Homes. “For instance, if your home is 3,500 square feet and you purchased it for $450,000, you essentially paid $129 per square foot.”
In general, the square footage number only includes the living space for the home. It does not include outdoor areas, basements, the overall lot, or other space.
Of course, rules for this calculation will vary by location.
“Kindred Homes calculates our square footage based on interior living space—the garage and patio are not included,” Horton explains. “Realtors (MLS) will also calculate the price per square foot based on the interior living space only. If you have a basement in your house, it could be considered in the total square footage if it’s ‘finished out,’ meaning it has HVAC and a finished floor and walls.”
Because this calculation is based on the list price of the home and its current square footage, when an offer is made and a sale goes through, that calculation will change to reflect what the buyer paid. An appraiser’s valuation of your home is not used to calculate price per square foot: The number is based on actual sale price, not estimated value.
The price per square foot on a property changes depending on the home’s list price. If your home is priced high during a housing shortage—like the one we saw in 2020 and 2021—the price per square foot will go up. Similarly, the price per square foot could increase if the home has unique features or if it’s located in a certain area of the country or even in a particularly desirable neighborhood.
“Typically, the price per square foot is pricier in a highly desirable area, for waterfront properties, or for new construction homes,” says Angel Nicolas, a real estate advisor with The Nicolas Group at Compass in Miami. “Based on all of those factors and more, the listing price will be different and therefore affect the price per square foot.”
Why Price Per Square Foot Is a Useful Valuation Tool
While price per square foot can show you how expensive a home is compared to others in the area, it doesn’t show the full picture in terms of the condition of the property or its potential.
“One home might have a higher price per square foot than others in the area, but it also might have a tennis court, a pool, a completely finished basement, and other amenities that other comparable properties do not,” Nicolas says. “All of that is factored into the listing price, and although those spaces are not included in the ‘living area/under AC,’ they play a major role in the home value and listing price, which inherently affects the square footage and the price per square foot.”
Comparing these apples to oranges valuations is where a real estate agent can help.
“It’s important to work with your real estate agent to get a sense of what homes in the area you are interested in are selling for,” says Dana Hall-Bradley, owner of Better Homes and Gardens Real Estate Fine Living. “The only reason you should pay more per square foot for an identical floor plan home is if the house is upgraded, has better features, a pool versus no pool, fenced, et cetera, compared to the comparable home. It’s essential to have the price per square foot listed on all your marketing material.”
Horton explains that your price per square foot can also be affected by the area in which you live, especially in areas where home prices might be substantially higher for a number of reasons.
“In more urban areas, your price per square foot will be substantially higher than in a rural or suburban area. This is due to the smaller lot sizes, making homes smaller, but, due to higher demand, the pricing will be higher,” she says. “... Most of this is a factor of land pricing. The higher the price of the land, the higher the price of the home, and most people want nicer finishes as the home price increases. Pricing is largely a function of demand and supply.”
Kenin says she always uses the price per square foot valuation when negotiating a deal for her clients.
“For example, I just sold a home this fall that included a main house at 7,300 square feet plus an unfinished barn with 1,200 square feet,” she says. “The barn was a major selling point. Buyers loved the idea of converting the barn into a guest house or pool house. When I negotiated that deal, I always reminded the buying side of the barn’s potential and the additional 1,200 square feet of living space that the barn would ultimately offer.”
Price per square foot also comes into play when negotiating a fixer-upper type home, with the price per square foot number dropping because the list price will be lower to reflect the home’s condition. Kenin points out that the seller’s agent will tout a home’s potential when setting the list price and the price per square footage.
Price per square foot is a helpful tool, but it’s not the only factor you should consider when buying a home. A real estate agent will be able to look at that number and tell you whether you’re getting a deal on a property based on other, less tangible factors.
“Calculating price per square foot when researching comparable properties is a very useful tool,” Nicolas concludes. “All homes are different, so if you can’t find a home that’s around the exact same size, built in the same timeframe, etc., it’s helpful to have the price per square foot to factor in.”