How to Evaluate and Compare Housing Prices

Are you poking around in today's real estate market? Are you just curious, or are you looking for the steal of a lifetime? Regardless of your motives, there is one statistic that you should be looking at and is rarely, if ever, mentioned by real estate agents. That statistic is cost per square foot.

If you have had an appraisal done, pull it out and take a look. No doubt the appraiser will show a cost per square foot of the subject property. It will also list of the square footage of comparable sales at the time the appraisal was written. If you have ever had a house built, no doubt the builder started with a cost per square foot as a base price. In most parts of the country, this cost per square foot is based only on primary living area, and excludes the basement and garage, regardless of finish.

These are professionals in the housing industry. If they use cost per square foot in their end of the business, you should be looking at this measure also when buying property.

Here is how:

Step 1. Gather the square footage of the house in question. The square footage will be on the listing sheet. Normally, the square footage for each floor is listed. Remember to exclude the basement square footage. It will be listed, but is not used in this calculation (this may differ in various parts of the country, but generally is excluded).

Step 2. If you have access to the property, take a tape measure and measure the outside dimensions of the house. This calculation is relatively straightforward. If the house is a rectangular ranch house, multiply the width times the length and it should give you a square footage close to what the listing sheet shows. If the house is a rectangular two-story, then simply multiply your measurements times two. This adds the square footage for the second story. For an irregular shaped home or multilevel homes, do the best you can to estimate. We will be checking both your work and the realtor’s work in the next step.

Step 3. It's time to do a little research. Most real estate transaction and tax information is available to the public and much of it is available on the Internet. For example, Tazewell County, IL has the following website available:

http://il-tazewell-assessor.governmax.com/propertymax/rover30.asp?sid=CC32A9C1CD8A424DA6BA47AF35FFD180

From this site you can gather tax sales and assessment history for your and other properties. For the subject property, determine what square footage is listed on the tax assessment. In our website example, this is indicated on the improvements tab. This will show square footage for both new and existing structures.

Step 4. Compare the three square footage numbers you have; the one from the realtor (listing sheet), the one from your estimation, and the one from the assessment office. The three should be very close. If not, you first need to determine which number is in error. After you're comfortable with the square footage, simply divide the listing price of the house by the number of square feet and that will give you the cost per square foot.

Step 5. Using the same source of public information, do a little research on some of the properties surrounding the home you’re considering. The sales history tab on the Tazewell site shows sales history of existing homes. Pick properties that have been sold preferably within the last 1 to 2 years. Divide the selling price by the total square footage and that will give you a comparable cost per square foot in the area.

This represents the most relevant market based pricing of real estate available. You should see a pattern of costs that are fairly close to each other. If there are some outliers, either high or low, there's probably something unique to that house.

Step 6. Now compare the average square footage costs for several homes to the square footage cost for the home you are considering. It should be comparable. If it's not, you have one of two possible situations: either the house is not priced appropriately, or there are very specific amenities or problems with the home.

Regardless, this approach offers the most objective way to understand the price of a house in relation to the market. It’s certainly not the only variable, but it is a great starting point. This is especially true if you are unfamiliar with the area.

Comments (1)

paul said:

	... With the housing market down so low, it is imporant to compare and evaluate housing prices to ensure you get a good price.
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June 29, 2009
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