Don't Use Price Per-Square-Foot When Valuing a New Construction Home

Real estate agents - and the real estate market in general - love using a home’s price per-square-foot to help buyers evaluate one home versus another. It’s great for them because it takes the focus off the total price of a home and show their buyers how they can justify opting for the higher price tag on a sale (and thus a higher commission).

When building a new home however (and even buying one, really), using price per-square-foot can hurt you, especially when deciding on build options.

How, you may ask? Well, let’s look at this scenario:

A new home construction customer works with their home builder to build a large home for a certain price and goes “builder grade” on all options and features during build time. The price per-square-foot on the home is in line with existing homes of the same size they looked at on the open market and ultimately decided against in favor of building a brand new home.

A few months later, in the same neighborhood, a second buyer completes construction of an identically-sized home, but instead opts for a custom kitchen with breakfast nook, a wrap-around deck, second floor custom laundry room and a completed basement with full bar and wine room. They also opt for upgraded tile throughout with floor heating, as well as hardwood floors throughout and brick accent walls in key hallways and family rooms.

Now, imagine you’re the next home buyer looking at each of these homes a few years down the line when each are on the market. Which home do you think has the higher price tag and, thus, the higher return in resell value?

You’d be right to say the second one, but let’s dig a little deeper still.

Other Things Matter A Lot More than Price Per-Square-Foot

Now, you may say, well, the original homeowner who built the second home in the scenario above also paid a lot more for their home, thus reducing their resell earnings, but that’s not necessarily true.

Why?

Well, the buyer of the second home who built their house with many more upgrades may well (and usually does) benefit from much more important developments, thus growing their return on resell despite a higher initial price tag:

  • Location - More than anything, the location of your new home determines its value. Make sure to research what’s there now and - most importantly - what’s planned.

  • Local Market - The long-term health of the home market in the location you’re building in is a great indicator of what gains you will see in value. We highly suggest using www.neighborhoodscout.com to see what the projected appreciation will be in your area.

  • National Economy - What’s happening across the country should be a consideration for you. If you’re going to sell in the next 10 years after your build is complete, it’s good to track healthy and predicted recession cycles too and how they’ll impact your area. For example, bad economic times may force big businesses to close or re-locate; and that can be deadly for long-term home markets (Just ask Peoria, Illinois, home of Caterpillar).

  • New Developments - Is there a planned shopping mall coming near your home? What about a new school? Or a factory? Check with the city to make sure you know what’s coming down the pike and that may affect your appreciation.

These items alone have more to do with the value of your home than anything else. Coupled with solid choices on build options during your planning and construction phases, they all add up to a much better - and more accurate - predictor of your new home’s future value than any price per-square-foot-calculation.

Plan correctly, ignore price per-square-foot and you’ll win now and when you go to sell.


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