When house hunting, buyers should compare pricing with other properties in the area.
One way to do this is to calculate the price per square foot, which allows homebuyers to understand the home’s value relative to its size.
What's in this article?
However, this calculation doesn’t tell the full story. Buyers must be aware of what this calculation includes and what it leaves out.
In this guide, we’ll explain why price per square foot matters, how it’s calculated and its limitations so you can use this information to its fullest potential.
What does price per square foot mean?
Price per square foot helps buyers evaluate a home’s value based on size.
The result is a dollar amount per square foot, which can be used to compare a home to similar properties.
Ready To Take Your Next Step?
Why does price per square foot matter?
If this is the first time you’re hearing about price per square foot in the context of homebuying, you may be wondering how buyers and sellers actually use it.
This calculation is most commonly used in the following ways:
- Determine property value: If a home is priced significantly higher or lower per square foot than similar properties in the area, buyers and sellers can take a closer look to determine why this is the case.
- Compare properties: Buyers can use price per square foot to compare properties of different sizes to determine if size or quality is more important.
- Make fair offers: Price per square foot gives buyers insights into whether a property is priced fairly compared to others, helping them make sure they’re not overpaying.
Price per square foot usually reflects the state of a local market, including supply and demand.
How price per square foot is calculated
Price per square foot has a simple formula:
Price Per Square Foot = Total Sales Price of Property / Total Square Footage
For example, if a home is $400,000 and has 2,000 square feet, the price per square foot equals $200.
Factors that affect price per square foot
While the calculation is simple, buyers and sellers must understand the nuances of price per square foot.
Total square footage
The total square footage used in the calculation is defined as the livable, finished space on a property.
This typically includes:
- Bedrooms
- Bathrooms
- Kitchens
- Living rooms
- Enclosed patios
- Sunrooms
- Bonus rooms
- Other heated and finished areas of the home
Total square footage typically excludes these areas:
- Unfinished basements
- Attics
- Garages
- Outdoor spaces
Some prices may consider finished basements or attics, depending on the quality and how they are used.
Location
Prices can vary significantly based on location—and even within the same city.
The following areas generally have higher prices per square foot:
- Urban areas, where land is more scarce and demand is high
- Desirable neighborhoods with excellent schools and low crime rates
- Emerging markets that are experiencing redevelopment
Property condition
Newly built homes that have recently been renovated and historic homes in good condition typically will have higher prices per square foot than older homes needing upgrades.
Property type
For residential properties such as single-family homes, condos and townhouses, price per square foot is usually influenced by the home’s condition, market demand and location.
If a buyer seeks a commercial property, the price per square footage is generally tied to the potential rental income and possible return on investment.
Property-specific adjustments
Certain home features or amenities may result in a higher price per square foot, including:
- Swimming pools
- Extensive landscaping
- Stunning views
- Properties on bodies of water
- Modern, open floor plans
On the other hand, homes with awkward layouts, wasted space or other undesirable features may have a lower price per square foot, even if the size is similar to other homes in the area.
Limitations in using price per square foot
Price per square foot is a valuable real estate calculation, but it also can be misleading if a buyer doesn’t have the full context, which includes:
- Quality of materials or certain desirable features
- Location and market health
- How you intend to use the space as opposed to the size of the space
- The value of the lot or land
How to overcome price per square foot limitations
Price per square foot is meant to be used as a starting point for evaluating a property’s value and comparing similar properties in the same area.
Consider the following strategies to gain a more well-rounded view of a home’s true value.
- Get an inspection and appraisal. A professional inspection or appraisal can help you discover the home’s true value in quality, craftsmanship and unique features. When you visit homes, list your desired features and compare them to similar properties. Remember, a home may be more valuable to you than someone else if it has features you want.
- Look at location and current market conditions. Research the neighborhood and local market to understand value based on different locations.
- Consider how the space aligns with your needs. A well-designed, smaller home may be more valuable to you than a larger one with wasted space. Think about how the property’s layout and features align with your personal needs.
- Separate land value from structure value. How much is the amount of land contributing to the overall price? Land is generally more valuable in urban areas than in rural or suburban areas.
- Use multiple valuation methods. Compare recent sales of similar properties in the area to determine the market value. Market value considers numerous factors to determine a property’s value—not just price per square foot. Your real estate agent should also be able to provide a comparative market analysis (CMA), which compares both the size and quality of nearby homes.
Start the homebuying process with Compass Mortgage
Choosing a home is difficult, but Compass Mortgage makes the mortgage process simple.
Start with our Get Committed® program even before you find a home. Get Committed makes it possible for you to secure a loan commitment, lock in your rate and submit a winning offer as soon as you’re ready.
There’s no need to wait until you’ve found the perfect home—apply with Compass Mortgage now to close fast later!