Pricing a home by using a per-square-foot (psf) value is nothing more than two simple numbers;
dividing the total sales price of the property by the total finished square feet of the home.
Using the price-per-square-foot method of valuing a home can be risky when using the best of
information. Using the information that is currently available for many homes, can result in a
dramatically “over” or “under” priced homes, both of which may hurt buyers and sellers.
Determining the accurate value of a single-family home requires a lot of thought; the ability to reason and extrapolate; and most importantly, a thorough knowledge of the homes that have already sold (and these days, are active) in the immediate area.
Although pricing homes on a psf basis is an easy concept to understand, it can be wrought with traps, especially in custom home areas, where no two are alike. And, if custom homes are also on acreage tracks, it becomes even more difficult and much more of an art than a science. All the information in the world is just dots and dashes without the knowledge and skill of how to interpret that data and use the appropriate parts. Not only are no two custom homes alike, it is rare to find two acreage tracks that are exactly alike. In the world of real estate, “it depends” applies to just about every aspect of the valuation and comparison processes. Based on the theory of substitution (where one home could be equally substituted with another to provide equal utility to an owner), the comparison process used to value real estate is highly subjective. It will never be a perfect system. This is one case where no computer will ever do the job better than a human. Real estate is a people business and circumstances play a huge role in the valuation process. Those circumstances cannot be known to any database. Even lots tend to have their own subtle differences. This is where the ability to extrapolate is critical.
Creating a value by using nothing more than a price-per-square-foot value, and not knowing which homes are truly “comparable,” is probably the most common mistake by homebuyers, sellers, Realtors, and anyone else who is trying to determine a home's value. It’s never quite that simple.
This method is vastly oversimplified. It is a ratio that only considers the relationship between size and sales price, and it assumes the size is accurate. More often than not, it is NOT accurate. Often, by a dramatic percentage. Homes with upper or lower level living spaces have the most errors.
This method does not consider that your neighbor's home (that sold for $100 per-square-foot) also had a pool and a view of the golf course. Of course the neighbor's home is going to reflect a higher price-per-square-foot than the homes without the pool and without a golf view. Often, homes on the same street are far apart in value. Proximity is NOT always indicative of comparability, which most computer generation valuations assume.
Price-per-square-foot is a greatly exaggerated tool and a starting point. It should not be used to determine the value of your largest lifetime investment. Be VERY careful when playing the price-per-square-foot game.