Price Per Square Foot – When Is It Helpful & When Is It Problematic?

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Austin Solomon | The Solomon Group – Coldwell Banker Action – (715) 212-4693

Hey everyone! It’s Austin Solomon with The Solomon Group at Coldwell. Today we’re talking about problems with price per square foot. Thank you for joining me on this week’s episode of The Real, problems with price per square foot, this is going to be a good one.

In real estate, agents, buyers, homeowners, are always looking for quick & easy ways to come up with property values. One of them that gets tossed around a lot and probably tossed around incorrectly a lot of times is price per square foot.

Some examples would be a buyer asking, “hey this property is at $110 / sq ft and this is $160 / sq ft – Austin, “Why is that? Why is there such a big discrepancy.”

A lot of times online, on the websites, they will have a little area where it shows the price per square foot and it’s not a bad reference point but sometimes it’s not good to put too much weight on that and here’s why.

There are so many variables when coming up with a properties value. There is location, there is the lot size, there is the quality of construction, there are updates, all those different pieces that can go into that price per square foot. 

More so where I see it the most, tossed around the most incorrectly is when you have a basement that is finished, a home that has a finished basement and a home without a finished basement. 

Let me give you an example – there is 1,000 sq ft home, a ranch style house with an unfinished basement and we are going to say it’s $150K. So $150K house, 1000 sq ft, so $150 / sq ft. Great, now let’s say that the homeowner is looking to increase their square footage. So they go to Menards, they pick up some drop ceiling or what would be ceiling tiles, the materials for a nice ceiling. The ceiling tile would be much cheaper than say, drywall. And then they get paneling for the walls and the cheapest commercial carpet that they can find to roll out on the concrete floor.

So the materials to finish this basement let’s say $8,000. So you grab the materials, you go home, roll out the carpet, glue paneling on the walls, and you install the drop ceiling. So for $8,000 you technically finished your basement now. 

That finish now just added 1,000 sq ft and now your home is 2,000 sq ft. You’ve doubled the size of your house for $8,000. You didn’t really double the size of your home, you just added or doubled what would be considered to be the finished square feet.

So now, if you use that same $150 / sq ft number, then your home would now be worth $300,000. Well clearly you can see that logic doesn’t make sense because when you go and finish a basement, you can’t use that same price per square foot number when it comes to finished square feet in the basement. But you see that all the time because you see that number calculated by the total square footage. Well, if the property doesn’t have a finished basement, you can’t really use that as a comparison and this example is why.

In general, homes that don’t have finished basements, they are going to have a much higher price per square foot – why? Because it doesn’t cost that much to finish a square foot in your basement versus adding finish to let’s say the side of your house.

I once even had a real estate agent wrote an offer on a property of mine and attached a market analysis where they had come up with the price per square foot of the homes in the surrounding area. To which, they consulted their buyer and they would only pay $X amount. I was the listing agent working with the seller. And even that real estate agent had a variety of different homes, some of which has paneling, old asbestos tiling in the basement as a floor covering and very cheaply finished basements and they were using that to advise a buyer on what the price per square foot should be on the home I had for sale, which had an unfinished basement.

Even real estate agents get this mixed up a lot of the time. This is one of the biggest ways price per square foot can be problematic.

Another extreme example, just to show you another example, would be lot values. A lot of times people forget the lots, the value of the land that the house is underneath, would also skew the price per square foot number. A property that is on the lake obviously is going to have a higher price per square foot than a home that is on a normal lot.

The other thing too is price per square foot varies between styles of homes. It’s a lot cheaper to build up than to build out. In general you’ll see for builders it’s more expensive to build a ranch style home or a 1-story versus a 2-story. Again it’s cheaper to build up than it is to build out.

Then you have bi-levels which again the foundations aren’t as deep into the ground, so the excavation costs are less. So those properties are a little bit easier, well not easier, but a little less expensive in excavation, so the price per square foot of those homes are potential less than the ranch. So there are a lot of different variations when it comes to style when comparing price per square foot.

When does it become valuable? If you have a lot of uniform homes in a subdivision or in a specific area. For example there are a few subdivisions in our Wausau area where a lot of the homes are similar and they may have 5-10 different layouts that were mass-built, built over the course of five years, so they are very similar homes. You might have 25 of the same home in a subdivision, spread out, in that case looking at the price per square foot may be very beneficial because they are very uniform. 

There you go! Price per square foot, just to kind of recap, when you’re looking at that number, you have to be cautious. Is it talking about price per total square foot? Is it talking about price per square foot above ground where the basements aren’t finished? So there are some of the cautions when the numbers are being tossed around, just be cautious.

Thanks for tuning in on this week’s episode of The Real and please join me on the next one!

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Austin Solomon | The Solomon Group – Coldwell Banker Action – (715) 212-4693

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