Do you calculate price per square foot correctly?
I know you probably think this is a no brainer question but it is one I decided to write about because I consistently see agents including the wrong areas in their total square footage figures. Not all areas and rooms in the house are created equal and they should not be lumped together when you calculate price per square foot.
It seems everyone wants to know what houses are selling for per square foot in the area they are in but this is not always the best metric to use. Depending on the neighborhood and the house it can be a reliable value indicator when used in conjunction with other approaches so it is important to know how to calculate price per square foot correctly.
Follow the leader
Since appraisers play such an integral role in the home buying process it is important for agents to follow the practices of appraisers so we are all comparing apples to apples. Keep in mind that appraisers don’t just make up what they do on the fly but instead they also follow established standards. Appraisers calculate and classify the square footage in a house using ANSI standards so that square footages are reported in the most accurate way possible and so that the calculation and measurements can be reproduced by everyone using the same method.
Can you see the potential for problems if the appraiser does not include certain areas in their overall GLA (gross living area) calculations but the real estate agent does? If agents and appraisers are using the same methods to calculate square footage, and for choosing comparables based on this square footage, then their value estimates will be more similar and the likelihood of there being vast differences between sales contracts and the appraiser’s final opinion of value will be reduced.
What areas are included when you calculate price per square foot?
Let me first point out that just because an area’s square footage is not included when you calculate price per square foot it is still being given consideration. When a buyer makes an offer on a home they are taking into consideration everything about the house including the value of all finished areas and amenities, and the sale price reflects this.
Many agents have expressed to me their confusion when reviewing an appraisal because certain areas are not
included in the GLA, however I reassure them that the final value estimate does include all areas and features of the house. The subject and sales comparables are all handled this way to be consistent. It would be wrong to include finished basement area with above grade living area on one comp but not on another as this would not provide a consistent method of comparing price per square foot among the comps.
You may have noticed that the underlying theme of this post is about consistency. If appraisers and agents are going to be consistent in how they develop value estimates then they will need to follow the same methods. When appraisers calculate price per square foot the only areas included are the above grade heated and cooled parts of the house.
Areas not included in price per square foot are porches, patios, garages, and enclosed porches that have less quality than the rest of the house. In addition, finished basements are not included, however they are still given value in the appraisal. Finished rooms that require leaving the main residence or passing through unfinished areas are also not included. Examples of these rooms include a room over the garage or a detached apartment. Again, these areas are given value but not included in the gross living area. Because they are included in the sale price their value is reflected in the price per square foot.
If you are an agent and would like help in calculating the square footage of a listing so that you can compare the correct square foot figures when you calculate price per square foot, feel free to contact me as I offer house measuring services. If you are a DIY type of person check out a previous post where I outline how to properly measure a house.
Question
Do you have any further questions or comments about the correct way to calculate price per square foot? If so, leave a comment below and let’s keep the conversation going.
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Our apartment was recently appraised for much less than we thought. I’m confused because the price per sq foot that was calculated by the appraiser was significantly lower than the other apartments in our same building. Our apartment is in better condition than many of the other apartments that sold so I’m wondering what I might be missing.
Looking at price per square foot alone is not always the best way to estimate value. If the units were smaller than yours then their price per square foot will be larger. The bedroom and bath configuration may be different as well or maybe the unit’s location within the development. If you know of sales that were not used in the report you can always challenge the appraisal and provide the sales you believe are better.
Well it’s even more confusing for realty agents because (drumroll…..) Price does not equal value. In value terms, the homes are limited by the market so unless other people have finished basements, returns will be minimal. On the other side of that coin, if you’re the only one without basement, value in trash can and you need the finished basement to recover. From a price perspective, as an appraiser, I try to pump the number as high as is reasonable and provable via bracketing principals, to at least credit the price cost into the value opinion. I’ve seen tiny basement townhome stock finish run around $10k retail, while awesome high end with wet bar and entertainment for mid to larger sized homes easily runs these guys $30k to $50k. Now with Coreillogical MLS in the mix, which confuses the issue completely and rather than start with base AGLA figures, they take the approach to whole home GLA instead. Those hooligans, always confusing price and value. I really wish the CO MLS was not corelogic. Wake me when it’s over and do your best to resist the Matrix if they try to wine and dine your local MLS board.
The MLS services have a ways to go before we can have total confidence in their GLA figures.
You’re correct Tom. If someone is going to compare based on price per square foot of GLA, then they should be, as you say, “consistent” and compare that number only to other figures of price per square foot of GLA and not price per square foot of GBA (Gross Building Area). It is a disservice to everyone if price per square foot is being thrown around and it is not qualified as to what square feet is included in the metric. Thank you for the post.
Thanks Gary. A lot of people do throw this number around without really considering that the price per square foot may include basement area when the property they are trying to value doesn’t have a basement.
Tom, great information and thanks for sharing your thoughts about a very confusing subject. I have a question about new constuction and and it has to do with question that we hear when people ask, what does it cost to build a house? It is easy to see when you look at the Track Builders that carry a good bit of inventory, especially on a home that is on a slab. But if you have a basement, I am assuming that the cost per square foot to finish a basement is different than the cost per square foot to finish the main floors.. Is there a general rule of thumb about the cost to finish a basement such as maybe 50% of the cost to finish an upper floor. And while I know the quality of finishes can vastly change that equation, the question we get as we show so many houses with unfinished basments is what will it cost me to finish this basment in terms of cost/square foot? Any guidance here?
Thanks for the question John. The value of a basement seems to be on every ones mind as I get this question a lot. There is no straightforward answer and no real rule of thumb, from and appraiser’s perspective anyway, about the value of a finished basement. We shouldn’t confuse the cost to finish it and the value that the finished area adds to a house. I would think a builder would be able to give you a pretty good cost estimate on what it would take to finish the basement because construction costs and materials are pretty much a fixed cost. On the other hand, the value that a finished basement adds will vary from neighborhood to neighborhood based on the value that buyers find in the extra area.
I like how you said, “Not all areas and rooms in the house are created equal and they should not be lumped together when you calculate price per square foot.” Very true, Tom.
Thanks Ryan. It is an issue that I see happening over and over so I hope this puts a little clarity to the subject.