Appraisal House Blog

The price per/sf method
April 14th, 2008 9:09 AM

I get calls regularly from unhappy realtors telling me that I must be wrong on my value, because 5 other homes sold in this neighborhood that were $125 per/sf.  This always cracks me up, because why even pay for an appraisal if it were that simple?  "Okay, I've pulled up all of the sales in my neighborhood in the past year.  I see that the highest price per/sf was $170, so I will multiply my square footage by that amount, so my house is worth (x)".  What a great concept!

Unfortunately (or fortunately for me) it's just not that easy.  Appraisals are to determine the price that a typical informed/educated market buyer would pay, without undue influence (such as a seller in foreclosure).  So to me - and to all appraisers, I would hope - the price per/sf is a realtively worthless number, unless you are in a very homogenous neighborhood where every home was built by the same builder at the same time on very similar lots, and you can find three homes with the exact same floorplan that have not been changed since the original construction (no updates, swimming pools, etc.).  In that rare instance, if you can find several sales of the same house as yours in the past 6 months or so, go ahead and do the multiplication.

Otherwise, you need a professional appraiser.  We look to see what is the most similar to yours - not the highest sales in the neighborhood.   If your house is 2,000sf, we are not going to look at homes in the area that are 1,200sf, nor are we going to consider 3,000sf homes, unless there is absolutely nothing else available.  Similarly, if your home was built in 1975, and there are several homes in your area that were built in the 1990's, we are going to look for other homes built in the 1970's before we would ever consider looking at the newer ones.  The same goes for lot size, views, quality, location, room counts, garage spaces, and several other items.  When we have found what we consider to the be most recent and similar comparables, we make adjustment for the small differences between them.  This step can still cause large fluctuations between the price per/sf.  For example, consider a 1,500sf house that the owners want to put up for sale.  If I have a comparable sale that is the same age, but is 1,620sf, but has a pool and new granite counters, that might be a $4,000 adjustment for size, a $15,000 adjustment for the pool, and $8,000 for the counters.  So let's say the comparable sold for $227,000.  All other things being equal, the comparable sold for $140/sf.   Does that make the Subject property worth $210,000 ($140 x 1,500sf)?  No, because after adjustments the value is $200,000 ($227,000 - $15,000 - $4,000 - $8,000), or $133 per/sf.  

That is not a huge difference, but on more dissimilar homes it really adds up.  The bottom line is that you should never use price per/sf to determine a value.  Either call an appraiser and spend $400 to get the right value, or have your realtor do a complete CMA (competitive market analysis).    

Posted in:General
Posted by Mike Lay (Austin Area) on April 14th, 2008 9:09 AMPost a Comment

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