Why Average Price Per Square Foot Can Only Tell You So Much About a Home

“I think people are often misinformed when it comes to price per square foot,” explains Brandy Coffey, an expert Sarasota-based real estate agent who’s sold 79% more single-family homes than other agents in her area. The average price per square foot only gives you a single number, which doesn’t tell you much about the condition of the home, its amenities, and whether it’s a good fit for your lifestyle.

“While the price per foot may seem like an easy way to compare homes, it is rarely a reliable method,” explains Sacramento-based flipper Robert Taylor, who’s been rehabbing homes since 1999. When it comes to buying a home, the price per square foot can be a tool in your work belt, but it’s just one tool. Ignoring a useful tool wouldn’t be wise, but you have to understand this tool’s strengths and weaknesses. Experienced real estate investors, agents, and others gave us their advice on using price per square foot to compare homes.

What is the average price per square foot, and how is it calculated?

Let’s go back to math basics to talk about average. You find an average by adding together a bunch of numbers, then dividing the total by the number of values you added together.

The average price per square foot is calculated by the home’s price, divided by the square footage:

Price of Home / Square Footage = Average Price per Square Foot

“Price per square foot is best used to compare properties that are already similar in overall size, location, style, and quality of finishes,” says Coffey. While no two homes are the same, price per square foot is most helpful when you’re comparing two similar homes in the same neighborhood. The number provides context within the neighborhood where you’re looking at homes.

Let’s take this into the real world, with three recently sold homes in the same neighborhood. These three real-world examples sold within the past year in Pittsburgh, less than half a mile from each other:

Home 1: 2-bed 1-bath townhouse, 1,000 square feet, sold for $271,000

$271,100/1,000 = $271 per square foot

Home 2: 2-bed 1-bath single-family home, 1,366 square feet, sold for $375,000

$375,000/1,366 = $275 per square foot

Home 3: 2-bed 1-bath townhouse, 1,088 square feet, sold for $215,000

$215,000/1,088 = $198 per square foot

From there, you can add the three values together, and divide it by the number of homes:

$271 + $275 + $198 = $744

$744 / 3 = $248

That means, on average, these similar homes in this area average around $248 per square foot. If you were home shopping in this same neighborhood for a home sized somewhere between 1,000 and 1,400 square feet, $248 could be a guiding number — if a house is priced much lower per square foot, it could be a good deal (or a real fixer-upper). Higher than that average? It could be overpriced.

When price per square foot doesn’t measure up

The average price per square foot might be a jumping-off point in the home shopping process, but that number is just an average. It doesn’t account for the many factors that make each home unique. Start assessing home value with price per square foot, but keep the following in mind when comparing homes.

Lemon vs. luxury: Accounting for the home’s condition

A single number can’t tell you the condition of a home. The higher-end or more custom a home’s features, the harder it gets to use price per square foot as a benchmark for value. This is because price per square foot is most illuminating when you’re using it to compare two or more similar properties.

Using price per square foot as your only measure of value would indicate that a sprawling luxury home is priced similarly to a much smaller home that needs critical updates. Price per square foot can’t account for the building materials, finishes, or the quality of work put into the home.

Calculating a useful price per square foot number “is very difficult on a custom home or a luxury home because you’re never going to find a home like that again,” says Coffey.

Here’s another way to think of condition: imagine that two homes in a neighborhood have the same square footage and were built within a year of each other. But:

• Ambitious Owner A gutted the kitchen, updated bathroom fixtures, and refinished the floors
• Owner B didn’t update the home at all

If both homes went to market at the same time, Owner B’s home would be listed for less, making it more appealing from a price per square foot perspective. But that number won’t indicate the work Owner A put into their property. Depending on your desires as a buyer, those updates might mean more to you than a lower price per square foot.

If you’re considering a home with luxury or custom finishes, then you’ll need to take a deeper dive into the numbers to assess value. In these instances, Coffey pulls together a comparative market analysis for her buyers, finding a few specific listings in the area that most closely match the home for sale.

Room flow, floor plan, and layout

Averages can help you visualize how much you’ll have to pay for each square foot of space, but they don’t specify the quality of that space. Everyone’s lifestyle is different, and as a buyer, you might crave a different layout or distribution of space.

The average price per square foot doesn’t account for the number of bedrooms, bathrooms, or if the kitchen is large enough to accommodate an island.

For example, a 2,000-square-foot home that has two bedrooms and one bathroom will probably be listed for less than a 2,000-square-foot home with three bedrooms and two baths. On paper, the two-bedroom home will look like a better deal, but for most buyers’ lifestyles and households, the second option will be more comfortable in the long run.

Price per square foot is also typically lower for larger homes in the same neighborhood, explains Taylor, which adds another wrinkle. Perhaps a three-bedroom, two-bath, 1,200-square-foot home in your neighborhood sells for $200 per square foot, and a three-bedroom, two-bath, 1,800-square-foot home in the same neighborhood sells for $180 a square foot.

If you put an offer on the second home based purely on price per square foot, you could be getting a good deal on the price per square foot — but end up with more house than you really need.

Useable space

When you’re making simple price per square foot calculations, you can miss out on the nuances of usable space within the home. “Up north, you might call it the heated living space,” Coffey explains, “But In Florida, we call it the living space, and you’ll need to establish, is it true living space?”

When it comes to square footage in real estate listings, basements and attics, even if finished, don’t always count toward total square footage. However, when pricing the home, the seller probably included the value of their finished basement. That means if you’re just looking at price per square foot on that seller’s property, it could look much higher than neighborhood norms because the livable basement space is not included in the calculation.

Location and views

When it comes to an area with a view, you can expect the price per square foot to vary wildly. In the competitive Sarasota coastal market, Coffey explains that the view is critical to determining a property’s cost: “Is it a lake view, a golf course view, or a preserve view? Or is it all three, what we call the trifecta.” If a buyer has their heart set on an ocean view in Sarasota, Coffey explains, “we would do a different type of valuation outside of price per square foot.”

That valuation might include paying for a professional appraisal if a buyer is particularly interested in a property.

Location isn’t just a factor in oceanfront or lakeview properties, and price per square foot can be misleading if the lot itself is valuable. A home in poor condition could be on a desirable lot in a booming location and will cost much more per square foot than a newly updated home in a less popular location. That newly updated home might seem like a better deal based on price per square foot, but its location might lead to challenges when it’s time for resale, or perhaps it’s just too far from your preferred neighborhood.

Average price per square foot only gives buyers a glimpse into the value of a home, but it doesn’t tell the full story. Every property is as unique as its buyer, and without all the details, the price per square foot doesn’t mean much.

Unfortunately, there’s no magic number that can tell you if a home’s the right fit for you. That comes from a thorough search, and the right real estate agent to guide you through the process. Price per square foot can and should be one part of your home buying search, but it can’t be everything.

Header Image Source: (fran hogan/ Unsplash)