Why Price Per Square Foot is the Worst Real Estate Tool

In the real estate industry, a common tool used by professionals is the price per square foot measurement. This metric allows real estate professionals the ability to compare and contrast properties based on a single number.

For example, a home that measures 1,500 square feet of heated living space that is also currently selling for $200,000 would have a price per square foot ($/SF) of 133.33. 

While this single measurement can be easy to read, and it can be used across many properties, using price per square foot is one of the worst tools you can use to compare properties. 

The price of a home, or a condo, or a townhouse, or any type of property is dependent upon several factors. Unlike most goods, a standard price does not exist for properties. This is due to the fact that no two properties are exactly alike. Properties may be similar in many ways, but no two properties are ever exactly the same.

If we look at the pricing of goods, say toilet paper, a unit price (the equivalent of a price per square foot) is an excellent tool to use when comparing goods and determining value of the good. If you find a 12-pack of toilet paper for $8.99 but find a 20-pack of the same brand and variety for $12.99, which one should you choose? If you use the unit price method you will find that each roll in the 12-pack costs 75 cents, while each roll in the 20-pack only costs 65 cents. In this example, the 20-pack toilet paper is a better value.

Why is this tool useful for comparing goods and not real estate? It is because goods are identical, and real estate property is not.

This poses a dilemma for those looking to sell real estate. There is no single way to set a price for a property to which everyone would agree as everyone has different preferences as to what is most important to them.

There are several methods of coming to a listing price and each involve either re-estimating the construction costs of the project, appraising the value of the land, or comparing other similar properties.

This final method of reaching a listing price for a property, comparing similar properties, is the most common method of reaching a listing price for a piece of property. It uses the concept of substitution, evaluating the cost of one property based on the similarity of another property.

With this comparison method, one must take into account several factors including size of home, bedrooms, bathrooms, garages, pools, age of the property, condition of the property, location of property. Since several factors are considered, it is not advisable to use only one statistical measure to evaluate a property. 

Imagine comparing the retired basketball player Shaquille O’Neal to other players by only using his free throw percentage. Using only one metric would diminish his overall value. Similarly, if you only used Shaq’s points in the paint metric, you would wrongly infer that the rest of his game was equally powerful.

Here is an example scenario in which price per square foot might be used in the real estate industry and why it is wrong to use it.

Assume you have a fictional neighborhood with several different types of homes. Each home is a different size, different shape, with different numbers of bathrooms, bedrooms, garages, and pools. Each home has different levels of finishes, and each home was built at a different time. Clearly these properties are not identical.

To compare and contrast properties in this neighborhood, adjustments need to be added or subtracted to the other properties before coming to a conclusion on a price for your subject property. For example, if your subject property is a 3-bedroom, 2-bathroom home, you would need to subtract value from a 4-bedroom home but add value to a 2-bedroom home so each home is similar in nature.

If you used the price per square foot measurement before adjustments, your data would be skewed because each property is not the same. As we established earlier, trying to compare data of differing objects in not advisable. If you used the price per square foot measurement after adjustments, your $/SF figure would be rendered useless as you have already made adjustments to come to a price. You wouldn’t need further evaluation of data as you already have a price to compare. 

While the price per square foot measurement seems like an easy and readily usable tool for comparing real estate property, it is not a worthwhile tool to use. Instead, there are several factors that need to be analyzed and evaluated before coming to a listing price. Like most things in life, there is no shortcut. Do not rely solely on a price per square foot measurement as your only method of comparison.

When It Comes to Real Estate, Think Like a Nun

When it comes to real estate, the three most important words are “location, location, location.” But when it comes to making an investment in real estate, the three most important words are “time, time, time.”

To understand how time and location go hand in hand in real estate, it is best to think like a nun and a priest.

The tried and true method to making money in real estate is to purchase a property in a great location, for a good price, and plan for the eventual growth and development of the area around your property. The key ingredient is to understand an area grows over a period of time, typically measured in years and decades and not weeks and months.

Nuns and priests have the fortunate ability to think in terms of not only years and decades, but centuries and millennia. Their focal points were set well in the past and their vision extends well into the future.

For example, the nuns of The Franciscan Sisters of Allegany started the St. Joseph’s hospital system in the Tampa Bay area in 1934. Today, the St. Joseph’s hospitals are part of a larger organization that stretches throughout the west coast of Florida.

One of the reasons St. Joseph’s hospital were so successful was because of the nuns’ vision of how the real estate market would look several years and decades into the future.

In 1984, St. Joseph’s purchased nearly 30 acres of land in southern Hillsborough county to build a state-of-the-art hospital. The only problem was that there were fewer than 5,000 people living in South County at the time. Today, the Apollo Beach-Ruskin-Gibsonton-Riverview-Sun City area is the fastest growing part of the county and has been for the last several years. The nuns’ foresight into future real estate use helped pave the way for the $225 million St. Joseph’s Hospital South.

Another example can be taken from the Jesuit order. From its inception in 1899 until the early 1950s, Jesuit High School was located in downtown Tampa. Then, in 1954, the campus moved to its current location along N. Himes Ave. At the time of the move, there were nothing but cow fields for as far as the eye could see.

Fortunately, the Jesuit priests had the foresight to understand that while there may have been very little around the campus at the time, the future potential of the real estate around the campus was tremendous.

Today, that area now houses the Tampa Bay Buccaneers practice facility and stadium, the New York Yankees spring training and minor league facility, a very large office park, medical facilities, and several other key developments in the West Tampa and Westshore neighborhoods.

To really make a meaningful return and improvement on your investment in real estate, make sure you use time to your advantage. While location is one of the most important qualities of real estate, your use of time is just as important. To really use time to your advantage, and to make the most out of your investment in real estate, think like a nun.

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Nico Hohman is a licensed real estate professional with a construction background in Tampa, Fla. Nico caters especially to first-time home buyers; home sellers; renters looking for a new apartment; and those looking to purchase and renovate a fixer-upper. Follow Nico on Twitter @TheNicoHohman, Like the Hohman Homes Facebook Page, share your favorite pins on the Hohman Homes Pinterest boards, and keep up with the latest from Hohman Homes at the LinkedIn Company Page.