Be Wary of Price-Per-Foot Comparisons
Everybody is looking for a shortcut in establishing the value of a home. Online home valuation tools are now everywhere, Zillow being the most popular. They simply are not accurate. If you can find the fine print, you’ll understand these tools are merely approximations of value and frequently have significant errors. If going online and plugging in an address does not work, what about utilizing the price per square foot to secure the value of a home? Unfortunately, it too is just another unreliable shortcut.
The average price per square foot varies from city to city, neighborhood to neighborhood, street to street, and even home to home. For all of Orange County, the average price per square foot in June of 2017 was $440. In San Clemente, where I did a bit of analysis, the average price per square foot for the past 12 months was $444 – about the same as all of Orange County. There were nearly 1,000 (947) homes that sold during this period, so it represents a strong data set. Let’s dig into it a little deeper.
The lowest price per square foot for any sale in San Clemente for the past year was $225 and the highest was $1,374, a 611% delta. San Clemente is pretty large and diverse, so that’s not a fair comparison. There are nine distinct market areas in San Clemente that narrow neighboring homes down geographically. To somewhat level the playing field, I did a high-low comparison for the specific market areas where the highest price was obtained and where the lowest price was obtained. As expected, the variance was less, but still very significant. In Southwest San Clemente, the area where the highest price was obtained, the lowest price per square foot sold was $354, a 388% difference. In Forster Ranch, where the lowest price sale happened, the highest dollar per foot sold was $740, a 329% premium. As you can see, the difference between the high and low price-per-square foot in these two areas is still way over 300%.
This demonstrates why price per square foot can’t be the sole, or even primary, indicator of the value of a home. There are way too many nuances that go into the Fair Market Value of a home. The location, number of bedrooms and bathrooms, lot size, usable lot, view, square footage, pool, spa, upgrades, amenities, condition, main floor bedroom, number of stories, school zone, privacy, architecture, floor plan, garages, parking, proximity to the beach, walking distance to town and so on, all determine a home’s value. As a data point, it is most useful, over time, as a gauge to determine which direction home values are moving and as a relative measure in a fairly new tract where homes are still very similar.
Professional REALTORS® and appraisers take a home and compare it to similar pending and recently sold homes, adjusting the value up and down based upon all of the differences. The price per square foot is just one factor. There are no shortcuts. The market analysis that professionals prepare is by far the most accurate method in determining the value of a home.