PRICE PER SQUARE FOOT
by Catherine Ross
$ per square foot is a common measurement of real estate “value for money”. But how useful is it, and what are the potential pitfalls?
It’s easy to see why $ per square foot has become a universal yardstick for homes in Los Angeles, and in many other US and international cities. It boils down value for money into a single number, simple to understand, straightforward to calculate, and easily comparable to other similar properties. But there’s the catch, as almost every home on the Westside is unique, there are often few, if any, similar homes with which to make a direct comparison.
So how should an informed real estate seller or buyer use $ per square foot to help make decisions on price and value?
The key point is to recognize it as an important but imperfect measure of value. Where a home or lot has few truly similar comparables in the market, then $ per square foot is at best only a guide, and at worst misleading. For example, you will regularly see teardowns priced expensively per square foot, because the value lies in the “dirt” rather than the home built on it. In these cases, focusing on $ per square foot of lot size will generally be a more meaningful comparison. Other factors to consider include location, age and build quality, market trends, and the existence of any negatives which would be difficult, impossible, or costly to resolve.
Appraisals of the kind typically carried out for mortgage lenders often attempt to address these issues by systematically adjusting the prices of the closest comps to reflect key differences and support a better like-for-like comparison. Their reports make interesting reading for those of you who like to do the math! Others will weigh up the differences in comparable properties qualitatively rather than quantitatively.
But what about the intangibles?
Objective differences between comps are only part of the story. There are plenty of unquantifiable aspects to a transaction. Buyers may love the feel of a place, the way the light falls in the morning, or the particular configuration for their needs. Sellers will make their own assessments of the likelihood that a potential buyer will progress through to completion, and the offer terms, as well as the offer price. It’s not unusual to find a property with quirks which limit the potential pool of buyers, but increase the appeal for a select few. Multiple offers are likely to increase the offer price and terms, but may encourage buyers to offer beyond their comfort zone, with greater risk that a sale subsequently falls out of escrow.
In the end, each property is unique, and the sale process can introduce additional factors which impact perceptions of value. As the old adage goes, the value is the price at which a willing seller and a willing buyer transact.
Here to help
Your real estate agent should bring a helpful perspective to consideration of value, both the quantitative and qualitative aspects. I would be delighted to assist buyers or sellers in the process, and can give my views, act as a sounding board, or provide a second opinion as you wish, with no obligation. You can reach me by email at [email protected] or by phone on (310) 882 9589 and for some further insights please visit TheRipeFig.com.