Tell me I’m wrong.
We like to make things faster and simpler – less traffic, shorter lines, instant messaging and even instant noodles.
Because of this, it is so nice for us to see an ‘all-in-one’ appraisal method used to find out property values. This is where the price per square foot method comes in.
It’s easy to recall and it’s easy to apply to many different kinds of properties. You can get this figure by dividing the selling price with the gross living area.
However, that is exactly why it should not be an approach to getting an accurate home appraisal. Pricing a home by the square foot overlooks everything from decorative lawns to high-tech kitchens.
You may hear a lot of opinions around this topic, but you can learn even more by reading between the lines.
Price per square foot seems to work if you consider factors like improvements, condition of the house, market expectations, diminishing returns, etc.
In other words, there really are many factors to look at and, therefore, no real magic formula that considers everything in one look.
To connect, as a licensed property appraiser, I personally shun this method since there are systems to valuation that need to be applied to come up with a reliable figure.
I’m sorry if I come out strong when talking about this. But when I hear the phrase ‘price per square foot’, my gut tells me to just correct the thinking of the person I am talking to.
What happens when ‘price per square foot’ is used in appraisals?
Here are a few points that make this approach impractical when used to find out property values:
- When the smaller house in the example has at least one fixture that is more valuable, it will STILL less expensive.
- The method does not account for premiums imposed when buying gross living area in excess of a specified limit.
- High-performance housing may have desirable features that make them more valuable and increase the market value of a home. Using a generic figure like price per square foot may not work well at all.
- Buyers may end up being deceived since features and amenities that can affect the actual gross living area are unaccounted for. This can even have negative tax implications since the value is not clearly backed by a feature of the house.
- Offers are typically made in lump sums rather than price per square foot; this makes the method rather irrelevant in most cases.
- Lastly, the appraisal method may be weak and prone to holes when used in legal disputes.
How are appraisals supposed to be done then?
Although there is no one true ‘best’ appraisal method, I believe standards make the process as smooth as possible.
In a guide I made, the appraisal process is detailed to show what homeowners should look at.
We typically use one or a combination of three methods to find out property values: sales comparison, cost, and income approaches.
Among other things, the guide emphasized how fixtures are overlooked. Appraisers look at these in detail so they can see the unique features of a house versus other similar ones in a neighborhood.
On top of that, it shows what you should look for in an appraiser so you know for sure you got a good one.
In conclusion, apart from having an overall neutral stance, this only means that the ‘best’ appraiser for you is the one who has principles that agree with you.
Can price per square foot be used for getting home value?
On the flipside though, pricing by the square foot may work for realtors when talking with buyers. So the answer is – yes, it can work for estimates, but no, not for formal appraisals.
Think about it. Buyers and realtors go through a lot before even talking about the market value of a home.
The buyer calls, the realtor does a follow-up call, the buyer looks for something else, the realtor gives more options, etc. This is may even be a ‘perfect’ scenario since the buyer calls first!
Anyway, that’s enough of that.
After all of those steps, going straight to business should be a high priority.
So, it only makes sense to use a quick fix such as price per square foot for purposes of discussing estimates.
After the realtor and the buyer agree on a house, then property appraiser enters the picture.
When it comes to valuing property, there are vast differences between how a realtor and how an appraiser does it.
This doesn’t condemn either of them in any way; there are simply vast differences between their roles.
Realtors need to come up with estimates so a prospective buyer can make certain decisions and property appraisers need to find out property values using proven methods.
Selling dozens to hundreds of houses lets realtors really know their house values. Jumping from one neighborhood to another just does that to you.
Having said this, it only makes sense that professionals can find out property values based on instinct. At least when it comes to estimates, anyway.
However, the final number presented to lenders and other parties require a more specific set of processes.
To this end, the price per square foot method just doesn’t cut it.
More and more factors increase the value of a house nowadays – ventilation, sustainability, interior design, solar systems, etc.
When you compare two identical houses using this method, things won’t add up.
As a result, the one with a larger gross living area will always be more expensive even when one of them has more of the features mentioned.
Conclusion
To this end, I wish I could give you a comprehensive home valuation calculator, but it just doesn’t work that way if you wish to get a real appraisal for buying or selling a house.
The supposedly convenient method may very well be a myth in the world of professional home appraisals.
There’s no need to worry though; appraisals don’t have to be complicated. Just look for licensed residential appraisers who are experts in their local area and you’ll be in good hands.
Have you tried a price per square foot appraisal that worked for you?
I’d be very much interested to hear your story. Feel free to shoot a message in the comments section below!
