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.
For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: