Price per square foot can help you compare home values and decide whether you’re paying too much for that dream home.
One of the easiest ways to determine whether a house is priced correctly—or figure out if it’s priced high or low in comparison to other homes—is to look at the price per square foot valuation. This figure is one of the ways you can make an apples-to-oranges comparison of properties easier to understand.
Christa Kenin, a real estate agent at Douglas Elliman, describes price per square foot as The Great Equalizer. “[Price per square foot] gives buyers a sense of where a listing sits relative to other listings on the market,” she says. “If a listing’s price per square foot is dramatically different than other similar homes on the market, it signals to buyers that the home may be priced too high or too low.”
So knowing price per square foot can help you get a better sense of the worth of a home, regardless of its specific size. Read on to learn how to calculate this number, why it’s important, and how you can use it to explore a home’s pricing.
How Price Per Square Foot Is Calculated
On its face, price per square foot is a simple calculation.
“To calculate the average price per square foot, simply divide your square footage by the purchase price,” says Carol Horton, chief marketing officer at Kindred Homes. “For instance, if your home is 3,500 square feet and you purchased it for $450,000, you essentially paid $129 per square foot.”
In general, the square footage number only includes the living space for the home. It does not include outdoor areas, basements, the overall lot, or other space.
Of course, rules for this calculation will vary by location.
“Kindred Homes calculates our square footage based on interior living space—the garage and patio are not included,” Horton explains. “Realtors (MLS) will also calculate the price per square foot based on the interior living space only. If you have a basement in your house, it could be considered in the total square footage if it’s ‘finished out,’ meaning it has HVAC and a finished floor and walls.”
Because this calculation is based on the list price of the home and its current square footage, when an offer is made and a sale goes through, that calculation will change to reflect what the buyer paid. An appraiser’s valuation of your home is not used to calculate price per square foot: The number is based on actual sale price, not estimated value.
The price per square foot on a property changes depending on the home’s list price. If your home is priced high during a housing shortage—like the one we saw in 2020 and 2021—the price per square foot will go up. Similarly, the price per square foot could increase if the home has unique features or if it’s located in a certain area of the country or even in a particularly desirable neighborhood.
“Typically, the price per square foot is pricier in a highly desirable area, for waterfront properties, or for new construction homes,” says Angel Nicolas, a real estate advisor with The Nicolas Group at Compass in Miami. “Based on all of those factors and more, the listing price will be different and therefore affect the price per square foot.”
Why Price Per Square Foot Is a Useful Valuation Tool
While price per square foot can show you how expensive a home is compared to others in the area, it doesn’t show the full picture in terms of the condition of the property or its potential.
“One home might have a higher price per square foot than others in the area, but it also might have a tennis court, a pool, a completely finished basement, and other amenities that other comparable properties do not,” Nicolas says. “All of that is factored into the listing price, and although those spaces are not included in the ‘living area/under AC,’ they play a major role in the home value and listing price, which inherently affects the square footage and the price per square foot.”
Comparing these apples to oranges valuations is where a real estate agent can help.
“It’s important to work with your real estate agent to get a sense of what homes in the area you are interested in are selling for,” says Dana Hall-Bradley, owner of Better Homes and Gardens Real Estate Fine Living. “The only reason you should pay more per square foot for an identical floor plan home is if the house is upgraded, has better features, a pool versus no pool, fenced, et cetera, compared to the comparable home. It’s essential to have the price per square foot listed on all your marketing material.”
Horton explains that your price per square foot can also be affected by the area in which you live, especially in areas where home prices might be substantially higher for a number of reasons.
“In more urban areas, your price per square foot will be substantially higher than in a rural or suburban area. This is due to the smaller lot sizes, making homes smaller, but, due to higher demand, the pricing will be higher,” she says. “... Most of this is a factor of land pricing. The higher the price of the land, the higher the price of the home, and most people want nicer finishes as the home price increases. Pricing is largely a function of demand and supply.”
Kenin says she always uses the price per square foot valuation when negotiating a deal for her clients.
“For example, I just sold a home this fall that included a main house at 7,300 square feet plus an unfinished barn with 1,200 square feet,” she says. “The barn was a major selling point. Buyers loved the idea of converting the barn into a guest house or pool house. When I negotiated that deal, I always reminded the buying side of the barn’s potential and the additional 1,200 square feet of living space that the barn would ultimately offer.”
Price per square foot also comes into play when negotiating a fixer-upper type home, with the price per square foot number dropping because the list price will be lower to reflect the home’s condition. Kenin points out that the seller’s agent will tout a home’s potential when setting the list price and the price per square footage.
Price per square foot is a helpful tool, but it’s not the only factor you should consider when buying a home. A real estate agent will be able to look at that number and tell you whether you’re getting a deal on a property based on other, less tangible factors.
“Calculating price per square foot when researching comparable properties is a very useful tool,” Nicolas concludes. “All homes are different, so if you can’t find a home that’s around the exact same size, built in the same timeframe, etc., it’s helpful to have the price per square foot to factor in.”