Price Per Square Foot in Real Estate: When Data Makes Us Less Informed
As professionals, we’re often as fascinated by real estate statistics as consumers are. Price per square foot is one of the metrics that is frequently quoted in attempting to value homes for sale, and it has become a ubiquitous stat on real estate websites.
While it’s an interesting piece of data in an online listing, frankly, it’s a waste of time. Price per square foot is a number that boils down dozens of unique factors in a house or condo and attempts to bundle them into one tiny package. Unfortunately, all it really does is instill a false sense of confidence. It takes away all of the unique, broad, and interesting features of the home that allow us to effectively evaluate its worth and instead melts them into a beige, unremarkable mass.
Price per square foot is the equivalent of putting a cheeseburger, fries, and Coke into a blender and trying to charge $5 for the resulting “Happy Meal”. To lean on it as a means for supporting a valuation is lazy. It ignores view, geographic orientation, floor plan, upgrades, nearby amenities, and property condition and gives the impression that it can encompasses them all with a single number.
As real estate agents, we often struggle to explain this to our clients. They feel more informed when websites are crunching data into these easy-to-digest figures and often think we’re being disingenuous when we tell them to ignore statistics like price per square foot when evaluating a home for sale. It seems illogical that this new information might actually be detrimental to their ability to evaluate a home, but unless they’re buying an entire neighborhood at once, it often is.
Let me give a quick example that might help explain this for the consumers most likely to use the price per square foot measure–condo buyers. Condos in the same building are theoretically the most similar homes in terms of location and style and should measure up comparably.
I pulled 44 sales in Seattle’s Escala condo building from the first half of 2012, and measured their price per square foot against floor number–just one of the many factors that could illustrate the ineffectiveness of this valuation strategy.
** Yes, this is a very old Microsoft Excel chart 😉 **
The first conclusion is fairly obvious: If we used price per square foot to compare one condo to another for value, we might be under $350/sq ft for one condo and over $650/sq ft for another. Averaging those numbers around $500/sq ft would still make valuations of some condos on lower floors and higher floors off by over 40 percent.
If we took the floor of the condo into account and only compared “nearby” properties to one another, the trend line of the numbers might seem to make more sense in the aggregate. For the individual home buyer, though, the resulting valuation could be still be remarkably inaccurate.
There are condos on the 2nd floor that sold for higher price per square foot valuations than some on the 10th floor. A condo on the 20th floor sold at a lower rate than one on the 9th floor. Condos within one floor of another often have sale prices that deviate up to $100/sq ft from one another, up to a 30 percent margin of error.
While the overall price per square foot trend is upward as the floor number rises, clearly any individual condo cannot be reliably compared to others in the same building using price per square foot. The floor number is just one way of illustrating the inefficiency of the measure. We could easily produce similar charts for condos facing East vs West, or those with views of a lake vs. a city. We could show that the upgrades in the home, the proximity to a desired amenity or a noise nuisance, or even the access to elevators and parking spaces will all affect the home’s value in a way that makes aggregated averages so inaccurate that they’re often not worth even considering.
Establishing the true value of a house or a condo is not a simple task, even if we’d like it to be. The more we attempt to ease the process by boiling together the unique and interesting qualities of a piece of real estate, the less effective our valuations of that real estate are. Statistics often only tell a small part of the story, and in this case, price per square foot tells us very little at all about a home’s true value.
Lee JinksPosted at 20:57h, 20 August
Not knowing how to use a tool doesn’t necessarily make it useless for the ones who do. Your graph illustrated that the average price per square foot tends to increase with higher floors. It also shows that one probably wouldn’t have to pay more than $450 per square foot for units on the 4th floor or below and that above the 19th floor, expect to pay $500 per square foot or more. In my little town, if I see the price per square foot of several cookie cutter homes within a few dollars of each other and then one which has a $20 difference, it give me a reason to find out why. Price per square foot is just a tool. If used properly and in the right situations, it’s a valuable tool. If not, it’s like any other tool you may not know how to use.
Sam DeBordPosted at 07:54h, 21 August
To your point, the chart shows me that buying a condo on the 7th floor, I should expect to pay $380k-$480k/sq ft…a 25% range, which isn’t helpful to a buyer. Buyers would find out a lot more by looking at features and sale prices of individual condos than PPSF.
This is the problem with PPSF. When the stats come out to support the expected position, it’s said to be working. When it’s inaccurate or unhelpful, it’s not said to be wrong, just “a reason to find out why.” All of this “tool” talk sounds a lot like a zestimate speech.
Lee JinksPosted at 09:23h, 21 August
Which condo feature tells you how much one should pay? I guess what I’m getting at is, if PPSF is worthless in analyzing the market, what “tool” would you consider accurate or meaningful?
Sam DeBordPosted at 09:43h, 21 August
A CMA with meaningful comps and a wide range of feature details is the only way to really evaluate a home.
Lee JinksPosted at 22:49h, 21 August
I’ve been thinking about this all day. Yes I agree with you. PPSF is not to be averaged and multiplied against the SF of any particular property to attempt to determine value. I think the value in PPSF is in determining the validity of any particular comparable. In your example, one could use PPSF to show that starting with comparable solds from nearby floors would be better than trying to make huge adjustments from using comparable solids from several floors away. On the other hand, utilizing the trend in PPSF could help with the particular adjustment made as a result of using comparable solids on different floors.
Sam DeBordPosted at 08:18h, 22 August
PPSF, like online home valuations, can be used in aggregate to show average trends in neighborhoods, etc, that’s true. They’re just not worth much for an individual property, which is what the vast majority of consumers are trying to put a value on. That’s probably why we have such different responses to the measure.
Lee JinksPosted at 18:27h, 22 August
Yes. You are right. And that’s what I meant by knowing how to use the tool. I completely agree that an average PPSF of any kind will not bring one to an accurate value on any individual property.
Sam DeBordPosted at 18:56h, 22 August
Well, I guess we agreed the whole time. 😉
Bryn KaufmanPosted at 15:37h, 21 August
Sam, I agree with everything you are saying, but at the same time recognize that buyers and sellers want this information and more.
I provide PPSF for both interior and the land, plus a ratio comparing the asking price to the tax assessed value, another some what confusing stat.
I have heard sellers promote they have the lowest PPSF in the neighborhood, so their very large home is a good buy, according to them.
Sam DeBordPosted at 15:52h, 21 August
That’s my take as well, Bryn. Buyers and sellers want to know it, so we’ll give it to them even if it’s a red herring. If it’s more stats they want, no matter the relevance, they’ll get them…more zestimate talk.
Lee JinksPosted at 22:50h, 21 August
Along these same lines, I consider days on market to be a red herring and I point this out to buyers when they ask about DOM.
Sam DeBordPosted at 08:19h, 22 August
True, DOM is like an individual unique property or individual seller. Some are ready to negotiate out of the gates, some will hold strong for a long time. No average can tell a buyer what one home’s price should be based on DOM.