Misconceptions around price per square foot in residential real estate often leave buyers feeling confused and frustrated. It’s common to believe that the price per square foot of a home should be similar to all homes within a real estate market. We’ve had clients pose concerns like, “Why is home A $200 per square foot, and home B is only $160 per square foot? Doesn’t that mean that home A is overpriced?” In fact, this logic doesn’t quite hold up in residential real estate. Here’s why.
Residential vs. Commercial Real Estate
Analyzing the price per square foot of a property is common practice in commercial real estate. In commercial real estate, professionals in lending and valuation rely heavily on this metric because it tells them how much businesses are willing to pay per square foot of space. This works in the world of commercial real estate because there aren’t many variables that set these properties apart from one another. Usually, new tenants in commercial spaces will redo the finishes within the building to fit their needs anyway, so the largest factor to consider besides square footage is location.
On the other hand, residential real estate involves several additional factors that play a role in overall price. Although the price per square foot is included in most listings, that number is not necessarily an indication of proper or improper pricing.
How Is Residential Real Estate Valued?
So, what are the factors that impact the value of residential real estate? To value residential real estate, we use a process called comparative market analysis. The factors that play into this analysis include the following:
- The area where the property in question is located, typically within about a mile
- The square footage of the property, plus or minus 10%
- The age of the home, plus or minus four years
- Upgrades and amenities within the home
By taking a look at other home sales within a mile radius of the home we are looking to value and then aligning our comparison with these additional details, we can gain a more accurate understanding of the market value of the home.
While most of this comparison comes from location, size, and age, you may come across instances where two homes that meet very similar criteria in those areas are priced differently or sold for a $50K difference. This is when we drill deeper into the specific updates and larger amenities that the more expensive home might have had. Details like granite or quartz countertops, air conditioning, or a very large lot might help drive the value up in comparison to other homes in the neighborhood. Weighing these factors requires a trained eye and deep familiarity with the market.
Example
To solidify the takeaway that price per square foot does not hold up in residential real estate, consider this example. You might see two homes next door to each other, one of which is 2,000 square feet and the other, 3,000. In this scenario, a buyer will always end up paying more per square foot for the smaller home. While the larger home may be worth more, it won't be worth 50% more in the same neighborhood and with the same type of lot. There are plenty of scenarios like this one, which is why we can’t rely on price per square foot in residential real estate.
There are countless factors that set a home apart from others. On the other hand, in commercial real estate, square footage and location are essentially the only details that help determine value. In residential real estate, value is not quite as simple, so getting caught up on a single metric like price per square foot is generally unhelpful. With the right agent at your side, you can trust that you’ll receive appropriate offer and value advice that takes all aspects of home values into account. I’d love to help — feel free to give me a call anytime at 719-337-7254 or 720-498-9592.
