How Do Appraisers Calculate Price Per Square Foot?

Think You Understand Price Per Square foot?

how do appraisers calculate price per square footHave you ever wondered how appraisers calculate the price per square foot of a home? If so, then I hope you’ll keep reading because I would like to clear up some confusion about how to calculate this popular metric and share my thoughts on how much importance we should place on it.

One of the most common questions I get from agents when speaking at their offices is about price per square foot. This is especially true for homes with finished basement area.

Some agents think that you should take the sale price and divide it by the total heated and cooled living area of the entire house, including the area in the basement. I will start off by saying that this is not the way that appraisers do it.

If appraisers and agents are all to work off of the same standard then agents should use the same methods that appraisers are required to use so that our results are similar.

Price Per Square Foot Guidelines

Appraisers have specific guidelines that they have to follow when performing appraisals and I share these with agents so that they can follow the same protocol. Hopefully, this will help agents be in the same ballpark of value with the appraiser when they price their listings.

When calculating the price per square foot the correct method is to take the sale price and divide it by the gross living area (GLA) of the home. The gross living area is the heated and cooled area of the home that is above grade and contiguous to the main living area of the home.

Heated and cooled areas that are NOT included in the GLA include below grade heated and cooled areas, finished garage apartments that you access by going through unfinished portions of the house (such as the garage), and detached recreation rooms or apartments that may be above detached garages.

Another not so typical layout would be a living area that you access by going outside of the house but that may still be attached to the house. I ran across one of these recently and it consisted of an attached carport that was enclosed for living area. While it was attached to the main house you had to go out of the house and then re-enter the other area through another door.

Some people find the method to calculate the price per square foot confusing because these alternative finished areas are not included. Even though they are not used to calculate the price per square foot their value is still factored in.

The sale price of a home takes into consideration all improvements that contribute to value, including basement areas, detached apartments, etc. When the sale price is divided by the GLA, the price per square foot includes these improvements and is reflective of the property as a whole.

The important thing to keep in mind is to compare apples to apples when looking at price per square foot. The price per square foot of the comparables should also be calculated in the same way so the comparisons are kept consistent.

The main reason for appraisers doing it this way is that the other living areas typically contribute less value than the gross living area and it could skew the value if you combine them.

Common Errors In Calculating Price Per Square Foot

A common error I see when calculating the price per square foot and then comparing two properties is consistency. Say you have a home with a finished basement and that area is included with the GLA to calculate the price per square foot. If you compare this to another home that had it calculated using a different method then your indicated value will be incorrect.

The quality and condition of most homes are usually consistent for the main level area, however, the finished areas in basements can differ from being very similar to hardly similar. If you lumped all of these areas together it would muddy the results because homes that had better quality would skew the results higher and those with lower quality would skew the results lower.

Another mistake I see made is to compare homes with basements or other superior amenities to those without. If you are pricing a home without a basement and using the price per square foot of a home with a basement then your indicated value will too high because the basement area causes the price per square foot to be higher.

The best way to accurately use price per square foot is to be consistent in how you calculate it and use sales that are the most similar to the subject property. This will assure you that your results will be more accurate and more closely reflect the market value of the home you are pricing.

Conclusion

Price per square foot is not the holy grail of value and it should not be relied upon as the only indicator of value. There is a time and place for this well-known metric but you have to know when it is appropriate to use.

As you can see there is a right way and a wrong way to calculate the price per square foot. If agents can calculate the price per square foot the same way as appraisers then their results will be more similar to that of the appraiser and this will help contribute to the agent’s results being more similar to that of the appraiser.

If you have any question about what areas are included in GLA or how appraisers calculate the price per square foot feel free to contact me.

Are You Going To AppraiserFest?

This year will be the inaugural meeting of AppraiserFest– Are you going? From November 1-3 in San Antonio, Texas appraisers from across the country will be attending the first conference by appraisers and for appraisers.

Attending a live conference is a great way to network with other like-minded appraisers who want to make a difference in our profession. It’s a great way to meet our online friends in person!

They will also be offering continuing education that has already been approved in numerous states. Hope to see you there!

Thank you, Jamie Owen of Cleveland Appraisal Blog, for allowing me to share this AppraiserFest promotional video.

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Comments

  1. Tom,
    You covered the subject what constitutes GLA well. I do have a problem with split-levels. I do not include the area below grade as GLA but I think that buyers and sellers, while maybe not familiar with “GLA”, do subconsciously consider this as living area. If market participants perceive the area below grade as living area shouldn’t the market realize it as well?

    • Robin, that is a good question. From an appraisal standpoint, we are required to report the living area as either above grade or below grade on the appraisal form that we use. The contributory value of the basement area will vary based on different factors such as location, quality, etc. The below-grade area on a split foyer may contribute just as much on a per square foot basis as the upper level but it must be verified by the market.

  2. Jeff Gossett says:

    Hi Tom. I look forward to your column and usually share on my facebook and with the newer agents in my office. I am a Realtor (30 years) in the Illinois side of St Louis MO
    If I compare a home with a finished basement to one with no finish is it proper to deduct a value for the finished basement then divide the sales price (minus the $ for basement) by the above grade SF? Sales are slim here and many times I have to use comps that are not twins to the subject.

    • Thanks, Jeff, I appreciate the kind words. It sounds like you are trying to get the price per square foot since you are dividing the new adjusted price by the above grade square footage. I don’t think this is the right approach to use. First off, I would suggest that you try and expand your search parameters to other similar areas that buyers would also consider. This would include neighborhoods that a buyer for the subject would also consider and that has similar quality, size, style, etc. Most agents I talk to think that they have to stay within the immediate neighborhood but as long as you are going to another competitive market area it should be fine. You just want to make sure that the comps are as similar physically, and sold recently, so you don’t have to make as many adjustments. I hope this helps.

  3. Nice job Tom. Price per sq ft is definitely something I pay attention to as an appraiser, though I just don’t use it arbitrarily to establish a value. For instance, I just finished up an appraisal this morning and the price per sq ft range for similar homes in the neighborhood ranges from 300 to 500 per sq ft. That’s a huge range. So a 1,500 sq ft house would be worth anywhere from $600,000 to 750,000. This is why we have to back up at some point and look at properties with similar locations, upgrades, condition, etc…

    • A value range of $600,000 to $750,000 sounds like a Zillow Zestimate! 🙂 You’re right, Ryan, we do have to back up and take another look from a different perspective when things don’t make sense. It is just one metric of many to consider.

  4. Excellent article Tom! You hit the nail in the head! I hope that many real estate professionals read your article and take it to heart. I also see this as being probably one of the most misunderstood issues that leads to value and pricing issues. Great article! I’m looking forward to seeing you at the AppraiserFest! It is my honor to have you share the video. Thanks for the shout out!

    • Thanks, Jamie, and thanks for letting me share the video. I love your other promotional videos and this one really emphasizes the need for appraisers to get organized and work together.

  5. Hi Tom,

    Good post. I’ll be at AppraiserFest so looking forward to meeting you. I’m rooming with Ryan Lundquist and will be helping George Dell at his company booth.

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