How Are 'Price per Square Foot' Adjustments Made?
As an appraiser, I get asked about 'Price per Square Foot' frequently.
"The average price per square foot in my neighborhood is $170 per foot. I just got my appraisal and the gross living area was only adjusted at $50 per square foot. Why was it not adjusted at $170?"
The price per square foot of a home includes the home, the site, garages, pools, patios, landscaping etc. and can be greatly influenced by remodeling, quality of construction, views and location.
Therefore, the adjustment for additional living area could not be adjusted at $170 per foot.
The adjustment would be based on the difference after all other items were deducted. For instance a home sells for $200,000 and is a 1,200 square foot home ($166.66 per sq ft) and is on a 7,500 square foot site valued at $50,000, has a golf course view that a buyer will pay a premium of $25,000 for, has a two car garage valued at $20,000, an in-ground pool valued at $20,000, site improvements (landscaping, patios, fencing etc.) valued at $20,000. This would leave the residual value of the home at $65,000 or $54 per sq ft.
In addition, the expectation in the neighborhood (minimum home size) has to be considered.
If the typical home in a neighborhood is 1,000 square feet - a home that is 2,000 square feet would not bring a value equivalent to the residual cost ($54 per foot). This is known as diminishing returns and as the size of a home or site goes up the price per square foot goes down.
As an appraiser, we have several methods to determine what an adjustment should be including paired sales, regressions analysis and market extraction.
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