Question:
“I can add onto my house for $200 per square foot and houses in my neighborhood are selling for about $400 per square foot. Why shouldn’t I just keep on adding onto my house until I hit the maximum the city will allow? If I can pay $200 and receive $400, I’ll do that all day long. What am I missing here?”
Answer:
Good question.
Here’s what you’re missing…
#1: Contrary to what some appraisers and agents may say, “price per square foot” (PPSF) is NOT a valid way to determine the value of a home. If it was, then indeed you should just keep adding.
#2: While PPSF only measures the size of the home, value is added by condition, upgrades, amenities, lot size, location, etc. As you add to the size of a home, you’re only increasing one component of the value.
#3: You’re fighting the “Principle of Regression,” which says that the value of a home superior to those typical in the neighborhood is pulled towards the average neighborhood home value. In other words, a 5,000 sqft mansion in a blue collar neighborhood of 1,000 sqft homes will have the value pulled down. Likewise, put that same mansion in a neighborhood of 10,000 sqft luxury estates of the rich and famous and the value will be pulled up (the “Principle of Progression”).
