Price Per Square Foot Calculator

What is Price per Square Foot?

Price per square foot is a commonly used and quoted metric in the real estate industry. This metric provides an approximate value of a property to both buyers and sellers. Effectively, the price per square foot calculation indicates how much a buyer would pay for each square foot of a property. This simple calculation allows for a relatively straightforward comparison of properties with different sizes.

Definition and Significance

The price per square foot is calculated by dividing the market value or purchase price of a property by its total square footage. This fundamental formula offers a standardized measure to compare the value of different properties. This metric is considered standardized because it considers the value of a property relative to its size. In effect, the price per square foot allows people to compare properties of different sizes in an easy-to-understand metric.

Use Cases in Residential and Commercial Real Estate

Price per square foot can be used to evaluate both residential and commercial real estate.

For residential real estate, calculating the price per square foot enables potential homebuyers the ability to generally determine whether a property’s asking price is in line with market conditions, ensuring they do not overpay for a home.

In commercial real estate, this metric is used by investors and analysts to assess the value of commercial properties. This can then inform decision makers on how to optimize rental income and understand potential returns on investment.

What is the Formula for Price per Square Foot?

The price per square foot formula is relatively straightforward:

Price Per Square Foot = Property Price ÷ Total Square Footage

This calculation ensures a standardized approach to valuing real estate, making it useful for various stakeholders to quickly evaluate the cost of different properties.

Let’s further discuss the metrics used in the calculation.

Property Price

Since real estate is an illiquid asset (unlike stocks), there is no readily available quoted price for properties. Therefore, real estate professionals will typically use the sales price or asking price in the numerator. However, in some instances, the replacement cost or cost-to-build may be used instead. Regardless, the property price used in the calculation assumes this value reflects the current market value.

Total Square Footage

The total square footage of a property is calculated as the length times the width of the property, both measured in feet. For example, consider a property consisting of raw land that is 50 feet long and 100 feet deep. The square footage of this property is 5,000 (50 * 100). Alternatively, the same basic calculation can be applied based on meters and square meters.

Calculating the square footage of a house or building is a little more complicated since many of these types of real estate have multiple stories (story or stories is the American English spelling, while outside of the U.S. the spelling is storey or storeys). In this case, the square footage of each story should be calculated and then summed to calculate the total square footage. The square footage of irregularly shaped properties (not rectangular or square) may need to be manually measured or otherwise approximated.

When considering a property’s square feet, most real estate professionals only consider the usable square footage. Unusable square footage consists of areas like stairwells and structural elements that a tenant or property owner cannot actually use. For commercial properties, rentable square footage is the usable square footage plus the tenant’s proportionate share of common areas (common areas include lobbies and restrooms).

Price per Square Foot Calculator Examples

To calculate the price per square foot, consider a home listed for $564,000 that is 4,000 square feet. The price per square foot is $141 per square foot ($564,000 ÷ 4,000). The $141 value could then be compared to other, similar houses under consideration.

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Factors Influencing Price per Square Foot

The price per square foot of a property can be influenced by a myriad of factors:

Location

Location is one of the largest influences on price per square foot. For example, a prime location can increase the price per square foot due to high demand. Prime locations may consist of properties that are closer to good schools, parks, or public transportation, among other amenities. Additionally, urban areas have higher prices per square foot compared to rural areas because of the higher demand for space in cities.

Material Quality

Higher-quality materials can increase the price per square foot. High-quality construction typically lasts longer, may require less maintenance, or add aesthetic appeal, all of which can lead to a higher price per square foot.

Property Type

The price per square foot of residential properties and commercial properties will vary quite a bit due to distinct market forces affecting each property type. For example, commercial real estate is used for business activities, which will result in different valuation metrics compared to residential properties, which are used for living purposes. Commercial properties typically have a higher price per square foot due to the ability to generate income.

Tips for Accurate Calculations

To properly calculate price per square foot, consider the following tips:

• Always use the most recently available data for price and square footage.
• Compare similar properties with comparable features to verify that the calculation makes sense.
• Inputs should be regularly updated to properly reflect current market conditions.

Importance of Understanding and Calculating Price per Square Foot

Calculating and analyzing price per square foot is crucial for anyone involved in real estate. Proper interpretation of this metric helps make well-informed decisions and evaluate investment potential.

Like any valuation metric, it’s important to be aware of the advantages and disadvantage of price per square foot.

Advantages

• Simplicity: Calculating price per square foot is relatively simple and provides an intuitive metric that can be easily communicated and interpreted. Because of this, price per square foot facilitates high-level analysis and screening of potential investments, enabling more efficient decision-making.
• Comparability: Price per square foot allows for comparison between properties of different sizes by scaling the price on a per-square-foot basis. This is particularly useful where properties vary significantly by size.
• Insight into the Current Market: Price per square foot can be analyzed over time to see trends in the real estate market. If the data exhibits an upward or downward trend, this may indicate potential appreciation or depreciation in properties, respectively.

Disadvantages

• Oversimplification: Although simplicity is an advantage, this metric can result in oversimplification. Price per square foot can ignore important factors like property condition, age, and neighborhood desirability, among many other factors.
• Variable Definitions of Square Footage: The calculation may vary depending on what areas are included as usable (or livable) square footage. For example, some house valuations might include square footage related to unfinished basements or garages, while others might not. These differences lead to inconsistencies when applying price per square foot in practice.
• Market Volatility: Like any market-based metric, price per square foot is susceptible to fluctuations in the real estate market.
• External Factors: External factors like future development plans or zoning changes can impact property values. These factors may not be immediately reflected in the price per square foot.

Conclusion

Price per square foot is a valuable tool for a quick comparison of both residential and commercial real estate properties. However, it’s only a “back-of-the-envelop” calculation and should not be used in isolation. The price per square foot can be influenced by many factors so a more detailed appraisal should also be performed. This more comprehensive approach ensures a more accurate and fair valuation, particularly for unique or complex properties.

Additional Resources

Thank you for reading CFI’s guide on Price per Square Foot. To keep advancing your career and skills, the following CFI resources will be useful:

• Real Estate Appraiser
• Fair Market Value
• Multiples Analysis
• Best Commercial Real Estate Certifications and Designations
• See all Commercial Real Estate resources