ArcaMax

Dear Monty: Why is it that so many people rely on price per square foot? Simply put: A home with 12 foot ceilings instead of 8 foot ceilings will typically cost more in materials (e.g., drywall, paint). Construction quality and "newness" can also play a role. I think it's highly misleading that the MLS, Zillow, etc., list the square foot price when there is no other descriptor of true cost/value. What are your thoughts?

Monty's Answer: While price per square foot is a commonly used measure, it's essential to understand its strengths and weaknesses.

Advantages of price per square foot:

No. 1: Quick comparison: It provides a simple way to compare properties of different sizes.

No. 2: Market trends: It can help identify general pricing trends in a neighborhood or area.

No. 3: Baseline metric: It offers a starting point for further analysis.

As you've noted, there are significant drawbacks to relying solely on this metric:

No. 1: Quality variations: As you mentioned, ceiling height can significantly impact construction costs without changing the square footage. Quality factors such as materials, finishes and craftsmanship affect value but aren't reflected in square footage.

No. 2: Amenities and features: A home with high-end appliances, a pool or extensive landscaping will likely cost more per square foot than a basic home of the same size.

No. 3: Layout efficiency: A well-designed smaller home may be more valuable than a poorly laid out larger home with wasted space.

No. 4: Age and condition: Newer homes or those in excellent condition typically command higher prices per square foot than older or poorly maintained properties.

No. 5: Location factors: The neighborhood's desirableness, proximity to schools or amenities and lot size/quality all impact value but aren't captured in the price per square foot metric.

No. 6: Home type: The cost to build up is often less than building out, so multistory homes may have a lower price per square foot than single-story homes.

No. 7: Size discrepancies: Smaller homes often have a higher price per square foot because certain costs (e.g., kitchen, bathrooms) are spread over less square footage.

There are a few reasons why platforms prominently feature this metric:

-- Simplicity: It's an easy-to-understand number that allows quick comparisons.

-- Data availability: Square footage is usually readily available, making it easy to calculate and display.

-- Industry standard: It's become a common reference point in real estate discussions.

You're correct that relying too heavily on this metric can be misleading. More comprehensive valuation methods are needed for accuracy.

What can be done to improve the situation?

-- Enhanced listings: MLS and real estate websites could provide more detailed information about property features, quality and condition to give a more complete picture.

-- Advanced valuation tools: Developing and promoting more sophisticated valuation models considering multiple factors could provide more accurate estimates.

-- Standardized quality ratings: A system to rate home quality and condition could add valuable context to the price per square foot metric.

While price per square foot can be a helpful starting point, it should never be the sole factor in determining a home's value. Buyers and sellers need to look beyond this simple metric to consider the many variables contributing to a property's worth. By understanding the uses and limitations of price per square foot, we can make more informed decisions in the real estate market. The goal is to find or price a home based on its overall value proposition, not just size.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @dearmonty or DearMonty.com.

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