How Agents Can Adjust For Square Footage

Tips For Agents on How to Adjust For Square Footage

I wrote an article once titled “Price per square foot is not the holy grail of property value” where I explained that price per square foot should not be the only metric given consideration when pricing a home. I thought it was important to discuss this topic because there is so much emphasis placed on this one stat over and above all others.

You can read more about my thoughts on this topic in the original article. One thing that I did mention in that article as well as others is that in certain situations the price per square foot can give you a reasonable method of comparison.

Whenever properties are very similar in all of their value-contributing characteristics with the exception of their gross living area (GLA), this one characteristic can be a good indicator of its value. Since there are variations in the size of most properties being able to adjust for the size of recent sales can help in accurately estimating the value of a home for listing purposes.

In this article, I would like to illustrate how a price per square foot adjustment can be calculated from recent sales so that a list price can be based on market data rather than a vague guess. Pricing a home based on market data can help the seller get the most money for their home as well as help them sell it in a reasonable amount of time.

Whenever market-based data is not used there is always the possibility that the home can be priced too low and money is left on the table or too high and it would take longer to sell. Even in situations like the latter example, if a home is priced too high it may end up selling for less than it may have if it had been priced lower (but more realistically) from the start.

It goes without saying that if agents utilize the methods that appraisers use, their list prices, and the eventual contract price, will be more in line with what the appraiser’s opinion of value will be. This will probably reduce the number of deals that fall apart due to the variances between the contract price and appraised value.

How To Calculate Price Per Square Foot

The first step in calculating price per square-foot adjustments is to find recent comparable sales that are similar to the subject property. It is important to have a good idea of what the top 5 or 6 features are that contribute to value.

This might include age location, quality, style, number of bedrooms and bathrooms, or anything else that a typical buyer would pay more for. It’s important to segment the market like this or else you may have features that are contributing to value but that is not being accounted for.

Location is one feature that some may not place a lot of emphasis on, however, it is a proven fact that buyers will
pay more or less for a home depending on where it is located. The concept of a competitive market area is important to know because it will help you look in appropriate areas if recent sales do not exist in the immediate neighborhood or subdivision.

Creating a search with these criteria in the local MLS system is the quickest and easiest way to find sales. Most MLS systems allow you to export your findings into a spreadsheet. I won’t cover that here, however, if you live within the Birmingham metro area and utilize the Greater Alabama MLS give me a call and I can help you learn how to do that.

The spreadsheet will help you calculate the price per square foot statistic as well as the adjustment factor you should make to the comparables you are using. The two most important items that you want to make sure are included are the heated and cooled living area and the sale price. The image below shows a download of sales information that includes the two items we are looking for as well as other information about the properties.

Just so you will know, I have attempted to find sales that are very similar to the subject property with the only difference being the living area. You can follow this same process to isolate various traits of your property that you believe account for differences in sales price.

The next image shows the sales that were exported from the MLS into an Excel spreadsheet. I have cut and pasted only the information I need for this analysis. You will want two columns with the first column being the GLA and the second column next to it being the sold price. I’ve also added the price per square foot of each sale in the last column.

It’s a good idea to have the heading at the top of the column so that when you create your chart it will include this and make the chart more easy to understand.

Now, for the next step, you will need to be familiar with how to highlight the data you want to include in your graph. I’ve shown this in the video included in this post so you can refer to it. You’ll see it is pretty straightforward.

After you have created the graph the next step will be to add a trend line and the formula for the trend line. The trendline formula is also known as the slope-intercept formula and it is a mathematical representation of the line.

The number before the “X” represents the slope of the line and reflects the price per square foot adjustment factor we are looking for. It shows that for every additional square foot of heated and cooled living space the value of the home increases by that amount.

As you can see, the number in our formula is 87.335, which can be rounded to $85. So, in our example, $85 is the price per square foot adjustment you would make. The video below explains the process.

To estimate the indicated value of the subject property you would get the square footage difference between the subject and the comp and multiply it by $85 which you would then add (or subtract) from the original price of the comparable sale.

After you do this for each of the comparable sales you would then be provided with a range of values from which to reconcile the value of the subject property. You can check out a prior post I wrote to see how appraisers reconcile a final value within their appraisal report.

Conclusion

I hope this example gives you a better understanding of how to calculate the price per square foot adjustment using sales downloaded from your MLS into an Excel spreadsheet. It’s important to keep in mind that the sales used have been chosen based on the fact that the only major difference between them and the subject property is their heated and cooled living area differences. If you have any questions about what I have explained feel free to contact me and as always thanks for reading.

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