How to figure cost per square foot

The price per square foot measurement can be a useful tool when analyzing real estate data, but I often see homeowners and real estate agents rely too heavily on this measurement when determining home values.

There is a time and a place to use price per square foot, but using it to determine the listing price of your home is typically not a good idea. A poor understanding of the price per square foot measurement can significantly hinder your ability to successfully sell your house fast and for top dollar.

How to figure price per square foot

Typically, people calculate price per square foot by dividing the cost of the home by the total cooled and heated square footage of the house. It’s a relatively simple calculation, which is why you can find so many home valuation tools on the internet.

With access to recent home sale prices and square footage data of recently sold homes, it is easy to determine the average price per square foot for homes selling in a specific neighborhood. Websites, like Zillow, use this information to estimate what your home is worth by multiplying the average price per square foot for homes in your area by the number of square feet in your house.

For example, if your neighborhood has an average home value of $130 per square foot and your house is 2,100 square feet, then many real estate agents and online home valuation tools will value your home at approximately $273,000.

A good use for price per square foot

I like to use the average price per square foot calculations to establish a solid macro view of neighborhood values. Generally speaking, we can say that if the average is rising, home values are rising.

Measuring price per square foot over time is a great way to estimate appreciation in the market. But you must have a large sample size or you risk corrupting your conclusions.

When price per square foot is wrong

If every house and lot were the same, price per square foot would be a great way to determine home values. However, when was the last time that you found two homes that were exactly the same? Even in new construction communities, homes vary depending on upgrades or modifications.

The simplicity of this measurement makes it an easy crutch for those that wish to determine values. Unfortunately, it presumes that the size of the home is the only element of value.

Think about this: If you and your neighbor have homes that are the same size, but you recently remodeled your kitchen and bathrooms while your neighbor’s house is still in original condition, don’t you think that buyers will be willing to pay more for your home?

In this case, using price per square foot would likely value your home at too low of a price.

Also, what if you recently added a pool in your yard? Recent data has shown that swimming pools can add nearly $40,000 to the value of an average home in Tallahassee, yet pools have no impact on the size of the home. Frontage and acreage are similarly ignored in a price per square foot valuation.

If one home is on a lake, and a similar sized home is not, do you believe they will be equally valued by homebuyers in the market? History suggests NO!

Numerous factors impact a home’s market value besides the size of the house. That’s why it is essential to work with an experienced real estate agent who is knowledgeable about market data and trends to determine the real value of a home that you would like to sell or buy.

Joe Manausa Real Estate is a brokerage company headquartered in Tallahassee. For more information, visit www.manausa.com.

How To Calculate Price Per Square Foot

If you’re looking to sell your home, or if you’re just generally curious about your home’s value, there are a couple of ways to calculate your home’s cost per square foot to figure out where your future or current home stands in your neighborhood’s market.  

What Is Cost Per Square Foot?

If you’re in the market to buy a house, you’ve almost certainly seen the price per square foot calculation somewhere in each home’s listing. 

For example, you may be looking at a home that is 2,000 square feet and is listed for $200,000. “That’s easy,” you think to yourself, “that comes out to $100 per square foot.” 

If you’re looking to buy a home in a specific neighborhood, you may notice that the price per square foot for each property varies wildly. Smaller homes, which you would assume command a lower price per square foot, are actually higher. And with larger homes, the inverse may be true. So what gives? 

Think of the price per square foot as more of a snapshot of each home’s assumed value in a particular neighborhood. Older homes may have a lower value compared to newer constructions simply based on the cost of building materials alone. Similarly, an older home with upgrades might have a higher cost per square foot compared to homes of a similar age. 

The cost per square foot of a home is just a single tool among many, which tells you more about the home you are looking to buy or sell. It’s a great way to compare homes of similar square footage in the same area. 

Does Price Per Square Foot Matter?

If you are a seller, the price per square foot matters because that’s how buyers and buyer’s agents decide what they’re willing to offer for your home. They compare your price per square foot to the average price per square foot of similar homes with similar features, so it’s worth having an idea of what yours is. 

As a buyer, however, you may decide that other features of a home, like a large backyard or specific design or architectural features, outweigh the price per square foot, so you may choose to price your offer on something other than just the price per square foot. In all, it’s a worthwhile thing to know, but the price per square foot normally won’t make or break a deal. 

Average Vs. Median Cost Per Square Foot

You may be wondering how you can compare the price per square foot of a home with other homes in an area. There are two ways: the average and the median. We know that to get an accurate cost per square foot of a house, you would divide the listing price of the home by the square footage. The equation looks like this:

Listed or sale price of the home / square footage = cost per square foot.

Now, by completing this equation for one home, you have a number that more or less tells you how much space you’re getting for the money and how much value your home has overall. The bang for your buck, if you will. 

Average Cost Per Square Foot

So let’s say your dream home has a cost per square foot of $100, as in the example from before. In order to see if you’re getting a steal or if your home is overpriced, you would then want to compare it with the average cost per square foot from similar-sized homes with a similar number of bedrooms and bathrooms, that also happens to be in the same neighborhood. You should only use homes that are either under contract or have recently sold in order to do your comparison.  Homes that are listed but not yet sold may have higher, unrealistic prices per square foot.

To find the average cost per square foot, you would take each comparable home’s cost per square foot and then divide it by the total number of homes. 

For example, we’ll use three different homes that have already been sold in the same neighborhood, again of similar size (around 2,000 square feet) to your home:

Home A: $250,000 / 1,500 square feet = $167 per square foot

Home B: $245,000 / 2,000 square feet = $122 per square foot

Home C: $190,000 / 1,900 square feet = $100 per square foot

Home D: $235,000 / 2,300 square feet = $102 per square foot

So, taking all of these homes’ cost per square foot and then dividing that by the total number of homes, we can get an average cost per square foot for this area.

$167 + $122 + $100 + $102 = $491

$491 / 4 = $122 

What this means in our hypothetical scenario is that, on average, homes in this area cost around $105 per square foot. With your home coming in at $100 per square foot, this is right on par with other homes in the area. 

If you’re looking to sell your home, it might mean that the market could support you raising your home’s cost a little more. If you’re looking to buy, it means that you’re getting a good deal. 

Median Cost Per Square Foot

Now, the median price per square foot is a little different. Remember from math class that median is synonymous with middle. So, the middle of all of these prices per square foot is calculated by this method:

First, arrange the prices in ascending order:

$100, $102, $122, $167

We know that the middle of these numbers is between $102 and $122. So, we add those together and divide by 2:

$102 + $122 = $224

$224/2 = $112

Using the median number of $112, we see that half of the homes sold below the median, and half of the homes sold above the median cost per square foot. 

This tells you that your dream home or current home is listed below the median value for other similar homes in the area.  If you are below the median, that could mean that other homes are in general newer or larger, or it could mean that the home is underpriced.  It just gives you another tool with which to understand the overall market. 

However, remember that our houses in this example are all of similar size and listed price. The median cost per square foot is a little more helpful in cases where the home values vary wildly, for instance, in neighborhoods with several newly constructed and renovated homes as well as older homes with fewer improvements. 

Using The Cost Per Square Foot To Your Advantage

Understanding the average cost per square foot and the median cost per square foot in a neighborhood can be useful in understanding the market that you’re in, as it’s based on similar homes in any area. You can add these tools to your home buying and selling toolbox. 

These numbers offer a snapshot of the pricing trends in your current or future neighborhood. While these are both great numbers to have, they’re more informative rather than the end-all-be-all of your home’s value. 

If you are looking to buy a home in a neighborhood that has a very low cost per square foot compared to the average cost per square foot of other homes, it could tell you that you may be looking at is a fixer-upper or a distressed property. If the home is above the average cost per square foot of other similar homes, you may be looking at a home that is overpriced. 

Overall, these numbers are great to have in your back pocket when assessing your home’s value. It’s important to note them when looking to buy or sell. However, you shouldn’t place too much stock in their worth. Think of them more as a snapshot of the value trends in the neighborhood. 

Online calculators are great tools to use when calculating both the average and median cost per square foot of comparable homes. These two numbers are great to have on hand and are worthwhile tools to use when buying or selling your home. 

They can offer insight on your home’s potential value, but they’re not the complete picture: so many other factors go into assessing your home’s value. 

But if you want to see where your home stands among others on the market, the average and the median cost per square foot is one of the better measurements to use. 

Why Average Price Per Square Foot Matters More Than You Think

Buyers and buyer’s agents use the average price per square foot of comparable homes to determine how much to offer, meaning that it’s an important number to know for both buyers and sellers alike. 

The impact of the price per square foot also doesn’t change much based on design upgrades or improvements that a seller might make. These upgrades may be able to nudge the number up or down a little, but usually, they’re not going to change the value of the home beyond the average price per square foot all that much. 

If you have any more questions about these tools and the way that they impact buying or selling a home, don’t hesitate to reach out to HomeLister for more information and personalized help. 

Sources:

1. https://www.omnicalculator.com/finance/price-per-sqft 

2. https://www.questionsanswered.net/article/calculate-value-your-home?ad=dirN&qo=serpIndex&o=740012

3. https://www.calculators.org/math/mean-median-mode.php