Is price per square foot a good indicator of a home’s value?

Question:

“I know you’ve said before not to use price per square foot to figure out home values, but an agent I know uses it all the time…”

Answer:

If price per square foot actually works, then I’ve got some exciting news. You and I are about to get rich!

How?

We’re going to build a real estate money machine. Here are the steps:

1. Buy an average 1,200 sqft house in an average area
2. Add on as much square footage as you can at $250/sqft
3. Sell the house at the going average price per square foot, around $500/sqft
4. Wash, rinse, repeat!

Now let’s run through this with some “real” figures:

1. Buy that 1,200 sqft home for $600,000
2. Add 2,000 square feet at a cost of $500,000. (You’ve now spent $1,100,000)
3. Now sell the house for $1,600,000 (3,200 sqft x $500/sqft) and make a $500,000 profit!
4. Repeat until you’re tired of making money

Obviously, this money machine has a few fatal glitches. The primary one being that you can’t value homes based on price per square foot even if that agent thinks they can.

Why doesn’t price per square foot work?

Because by definition, it ignores EVERYTHING other than square footage.

Don’t you think that little things like these make a difference?:

• Location
• Number of bedrooms and bathrooms
• Floorplan
• Condition
• Décor
• View
• Garage
• Amenities
• Usable lot size
• Etc.

I’m betting you said “yes.” But price per square foot ignores all that.

Indeed, square footage is ONE factor in determining value, but not the only one.

So that’s why you should run from any agent that quotes price per square foot as the way to determine value.