When buyers are evaluating the value of a house, several factors come across their mind. There’s curb appeal, and of course, location. The price per square foot is another essential metric. But if you don’t understand where this metric comes from, you’re going to be a disadvantage when you’re negotiating.
To find a good value, you’ll need to consider the various factors that affect a home’s value. For example, a home in a highly-rated school district might cost much more than a comparable home three blocks away in a marginal school district. But what other factors do you need to consider? What unique features can cause a home to cost more or less?
We’re about to take a deep dive into what price per square foot means, how it’s calculated, and how to determine where you’re getting the best value. We’ll also talk about how to compare comparable listings, and how to find sales information for a particular area. Understanding all of this is vital and will play a role when you figure out how much to offer on a house. Let’s get started!
How Do You Calculate Price Per Square Foot?
Let’s start with the basics. How do you figure out what the price per square foot is for a given home? Simply put, you take the total price, then divide it by the square footage. Keep in mind that the price per square foot is generally lower for larger houses, and higher for smaller homes. Here are a few examples:
- A 2,000-square foot home is listed for $400,000. In this case, $400,000 divided by 2,000 is $200 per square foot.
- A 1,500-square foot home in the same neighborhood is also listed for $400,000. The price per square foot is $267 per square foot, more than the larger home.
- A 2,500-square foot house nearby is listed at $450,000. In this case, the price per square foot is $180, less than either of the other homes.
It’s important to remember that price per square foot is only one metric. It doesn’t tell you anything about the home’s layout, or other features such as how many bathrooms there are or whether or not the basement is finished. For example, basements generally aren’t included in square footage calculations. If the 1,500-square foot home has a 500-square foot finished basement and the 2,500-square foot home has a simple concrete cellar, that will affect the overall value, but not the price per square foot.
That said, the price per square foot can give you leverage when negotiating with a seller. You can show them listings for homes in the same neighborhood with a lower price and use that as a tool to talk them down. At worst, they’ll refuse to meet your price. At best, it can help you get a much better deal.
Finding an Average Cost Per Square Foot in an Area
Suppose you’re dead set on a particular neighborhood or school district. In that case, it can be a good idea to figure out the average price per square foot for that area. To do that, you’ll first need to choose a sample set of houses. Then you calculate the price per square foot for each of them, add them together, and divide the total by the number of houses.
For example, in the last section, our house prices were $200, $267, and $180 per square foot. 200 + 267 + 180 is 647. Divide that by three, and you get about $216 per square foot. That’s your average for the neighborhood.
How does this help? Simply put, it gives you a rough measurement of whether or not you’re getting a good value. If you see a home in that neighborhood that only costs $140 per square foot, you might want to look twice and see if there’s anything wrong with it. Conversely, if a home costs $300 per square foot, it’s probably overpriced.
Understanding Real Estate Comps
To make the price per square footwork for you, you need to understand comps, or “comparable listings”. These are homes that can be usefully compared with the listing you’re looking at.
To find useful comps, you’ll want to find homes that sold within the last three to six months. They should also be nearby, definitely in the same school district, and ideally in the same neighborhood. Moreover, they should be roughly the same age. A 20-year-old house is fundamentally different from an 80-year-old house, for example.
Also, comps should be of a similar size with similar square footage to the home you’re looking at. Remember, size has a significant impact on the cost per square foot. Finally, search for homes with similar attributes. For example, if you’re looking at a home with an in-ground pool, your comps should also have in-ground pools.
Once you’ve found a few good comps, perform the calculations we talked about, and determine the average price per square foot. This will give you a good idea of whether you’re getting a good deal and what your negotiating position is.
How to Find the Necessary Data
Of course, to do all these calculations, you’ll first need to get your hands on some reliable data on actual sales in the area you’re considering. So, how do you find out the listing price and square footage information you need?
To begin with, you could simply check some online sources. Unfortunately, not all of these sources are reliable. For example, many include houses that are still on the market, which can skew the numbers higher. Make sure you’re only looking at closed listings if you’re using an online source.
You can also check public records. This is the most reliable source, but property records are not always available online or easy to use. A local multiple listing service fills a similar role but may or may not be available in your area.
Regardless of your location, a real estate agent can be an excellent source. You’re going to want an agent to handle your purchase anyway, so why not connect with one right away? Ideally, this agent should be local. The better they know the area, the better insight they can give you into a home’s value.