Measuring Value: Package Price

In speaking to a client the other day, I realized how much stock many folks are putting into "package price." Package price is the average dollar amount per square foot of dwelling. The price can be arrived at by taking the asking/selling price of a home & dividing by the square footage. This method of measuring value is very common, but more times than not, it is unreliable.

The question my client posed was regarding two different sized homes on the same street. The larger home was approximately 3,000 square feet, the smaller was around 1,800 s/f. The question: Why such a huge difference in price per square foot between two houses located on the same street? It's a great question, and anyone can imagine how this might skew a consumer's view about a particular home as being over-priced/under-priced. There is no shortage of variables as to why package price can differ substantially between two or more similar looking pieces of property. I will attempt to address a few reasons.

First off, in the above example, a 3,000 s/f home & a 1,800 s/f home have nearly too much difference in size to even make a fair comparison. However, for the purpose of illustration, the example is perfect. Typically, when comparing houses of similar style, age, & location, as the gross living area increases, the price per square foot decreases. It's the same principal that governs buying a single can of your favorite softdrink vs. buying a case of 24 cans: The price per can is lower when bought in bulk.

Another more obvious reason is condition of the improvements. Obviously, the better the condition, the higher the price per square foot. This is an important variable with regard to older housing. The higher the actual age of the dwelling, the more condition plays a role in pricing.

The quality of finish/materials in one dwelling versus another is also important to note. The more sophisticated a market, the more important this aspect becomes. Some markets are content with, perhaps, even prefer plush carpeting & vinyl to hardwood & ceramic/granite/marble tile floor coverings. Also, sophisticated markets provide the seller with more opportunity to make a nice return on investing in more expensive materials & finishes. Conversely, a market that does not recognize the value in more expensive quality finishes will not be willing to pay for it, which leads to much confusion and discontent for those sellers who go all out with regard to quality only to have the market disapprove of the results.

Another possible reason for the substantial disparity between the package price of two similar looking pieces of property is functionality. A 3,000 square foot dwelling could have a mess of a floorplan. It could be choppy, or the rooms might have poor placement. A 1,800 s/f house on the other hand might be open, and its floor plan might be so functional that the dwelling actually "lives larger" than its gross living area might suggest. In order to compensate for the lack of functionality of the 3,000 s/f house, a seller must discount his/her package price because the market is not willing to pay the same amount per s/f for disfunctional living space.

It's also important to look at whether a house has a basement or not, whether the basement is finished in any way, and how much land the dwelling has. These are all somewhat hidden features that get figured into package price, and these features probably contribute the most to the larger disparities in package price. For instance, if the typical building site in an area is a quarter of an acre, but a smaller house on just under a half acre is priced above the subdivision's top sale price, its package price may look high when in reality, the value difference lies in the extra land.

I hope whatever I lack in clarity on this subject can be made up by offering to answer any questions on the subject via email. Please feel free to ask away.