How do you price homes? The subject is involved, and yet, while there are many different approaches to pricing such as the wildly inaccurate automated valuation models (AVMs) like the Zestimate, most brokers use the price per square foot (PPSF) approach to generate valuations. Getting familiar with the PPSF method yourself is a requirement for sellers who want to achieve the highest net proceeds since most brokers and agents have a misaligned financial incentive to send you off in the wrong direction-- it pays off if you have your own map.
To get a PPSF for any given home, you divide the price by the size of the home, as measured in square feet. This simple division turns the livable space of a home into a metric that can be used to compare similar homes of slightly different sizes in a standardized way. We’ll provide an overview of how to use the technique below, but please recognize that home pricing is the subject of many books and research, so consider this a high-level overview. However, it should be enough information to get you into the pricing game so you can start working with real data instead of speculations.
First off, what constitutes similar homes? One general rule of thumb is to limit your comparisons to homes that have a similar number of beds and bathrooms, lot sizes, and square footage that is within 10-15% of the subject home. Sometimes the construction date can be considered as well. For single family homes, you will want to stick to nearby homes in the same neighborhood or area because the adage “location is everything” is true. If you are comparing condos, the most accurate comparisons are within the same building before making comparisons to other nearby buildings. Sometimes it can be hard to find enough similar homes that have been sold recently in the last 3 to 6 months. If you can’t find enough comparable recent home sales, you can expand past the last six months, however, be careful to adjust for any changes in market conditions over those time periods.
As one example of a time adjustment to PPSF, if your local MLS is reporting that home prices are up 10% over the last 12 months and you’d like to use a sale which is nine months old, then you might move the PPSF up by 7.5%. Be aware that these approaches can get tricky and become less accurate as your assumptions build up. Things work similarly but oppositely when home prices contract and if the housing market is merely flat, you won’t need to adjust the PPSF of older sales at all.
Next, once you have your group of similar homes with different PPSF’s, start looking at the photographs for each of these homes and benchmark the level of finish across important features, as compared to the subject home you are pricing. After you are done reviewing the relevant information and photos, you will make a simplistic determination-- is the subject home more desirable or less desirable than the photos of the sold home?
If the subject home you are pricing is more desirable, then that PPSF is a likely price-floor for your home. If the subject home is less desirable, then that PPSF is a likely price-ceiling for your home.
The idea is to continue this iterative process until you narrow things down to a PPSF band with minimum and maximum PPSF numbers that approximate the relative desirability of the subject home. To make those numbers relevant to the priced home, multiply the subject home size in square feet by the PPSF, and you will have an evidence-based price range estimate for the home.
Once you establish the range, you can close that gap by blending the numbers depending on where the subject home is relative to nearest high and low PPSF. Interpolation is where home pricing becomes more of an art, and you’ll have to use your best judgment. Often the PPSF of current listing data can be used to help, especially when the days on the market is high and it’s clear that no one is paying the requested PPSF for that level of finish. Similarly if a new listing in an appreciating market with a low PPSF goes pending in exactly 7 days, the most frequently used offer review date, you can likely assume that the buyer paid a higher PPSF in a multiple offer situation but you won’t know exactly until it becomes a sold transaction usually 30 days later.
Obviously consider the location market conditions and trends as you interpret the results and refine your approach to pricing, paying particular attention to the average time on market for listings at any given time. Ultimately the best way to practice home pricing and refine the craft is to derive price for new listings yourself, and make an estimate on what you think will happen based on comparable PPSF data, and then sit back and watch the results. When listings convert to sold data points in the future, the results are a report card which is definitive and helpful for tuning into better accuracy and precision.
Sometimes it can be hard to find recent sales or photos of sold homes. The best place to get this information is from the MLS and many public websites, such as Redfin, allow you to see this information if you set up an account. Zillow also publishes many sold photos. If for some reason those photos are not available, then you may have some luck with a search engine query on the address. Finally, if you can’t get these photos online, then you won’t be able to price homes using PPSF unless you get photos through a real estate agent who has access to the local MLS where that information resides. Sometimes it can be hard to find recent sales or photos of sold homes.
The research needed to get comfortable with the comparisons can take some time, and accurate pricing is an art to get right. Home sellers may need to spend a few hours or even many days to properly review the data and get comfortable with a price if they want to truly get within 1-2% of the actual present market value.