There have been many times that I’ve heard of, or experienced myself, when an appraisal is being done, and at some point during the walk-through the agent shows up with a list of “comps.” They start talking about how much this property should cost based on these other properties that have sold for “252 dollars per square foot.” And, because these “comps” have sold at that price, of course this property should, too.
This phrase – price per square foot – will likely come up in conversations between realtors or agents and appraisers. I love my real-estate agent friends, but what they do is very different from what I do. They were trained and brought up in the real-estate world in a different way than I was. However, this idea of price per square foot can be misleading, and I feel it is something we should try to steer away from. Allow me to illustrate how this idea can be misleading.
In 2020, the market price for a new Toyota Camry was $24,425, and it weighed approximately 3,400 pounds. If you calculate it, the price per pound for a Toyota Camry was just over 7 dollars. In the same year, Ferrari Portofinos were selling for $215,000, and each weighed about 3,669 pounds. That’s right – the price per pound for your Ferrari comes to over 58 dollars.
Why does this matter? Well, if we do the math using the Toyota as a comp for the Ferrari, the Ferrari should cost $26,343. Or, alternatively, if you were using the Ferrari as a comp for the Toyota, the Toyota should cost $199,240. You might argue that a Camry isn’t comparable to a Ferrari – and you would be right. That’s my point. You have to be very careful about the comparisons you make. And that, my friends, is why we have appraisers.
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LOL Agreed, I try and explain that it’s raw data number that does not take into consideration differences in quality, garage count, amenities, bath count, bedroom count etc…
The per SF cost usually included the land, outbuildings — everything…….. NOT just the GLA of the house
I just say, “Well there about 15 – 20 property characteristics I will be evaluating and comparing, and the size of the house is just one of those characteristics.” Then I slap them, not too hard, and give them a stern finger-wag.
I just listen and take what ever information they have to give me and move on. I do my own dollar per square foot analysis and explain it in the report. That Stands up in any confrontations after the report is submitted.
I think the most important factor that comes into play in these situations is the law of diminishing returns. When talking about price per square foot you have to consider the square footage itself is it the first 1,500/sf which is generally accepted as the most useful and valuable or the last 200sf which could have much less utility. In appraisal assignment I normally consider it to be the last 200/sf and thus adjust must lower than the actual cost which is typical for ever appraisal I have completed or reviewed. This is the reason I have always given clients when they sometimes ask how the square footage adjustment only $50 when the price per square foot to build is $150 and they always accept that as logical reasoning.
Price per square foot is great for analyzing a market or something that sells by the foot like lake front land, but not most homes. For price per square foot to work, you need comps that are incredibly similar and in such case, why not just compare them directly?
If price per square foot were the only metric to determine value, appraisers would no longer be needed. Which would be ok, because I will just double the square footage of every home that I own. In turn, the value of my property doubles, I sell them all and sail off into the sunset.