One of the most common questions we get as realtors from buyers and sellers is about the price per square foot when comparing properties to derive value. One of our most experienced and respected local appraisers, Rick Hackney, explains the flaws in making comparisons using price per square foot and points out why it is even less accurate using this measure in the Big Bear real estate market.
Why Doesn't a Big Bear Appraiser Use Price Per Square Foot to Determine Value
"What is the price per sq ft?" I get this question often from realtors and homeowners. Because this is a common method of comparison, I thought I would explain how appraisers view this approach to value.
The price per sq ft is the most familiar method of comparison that many people are aware of. Remember that everything about the property is summed up in the price per sf, including the lot size, view, age, quality, condition, and other features, all lumped together into a price per sf. Because of this, it is important to select sales that are very similar to the home you are appraising and from the same neighborhood.
If you have a home with a 2 car garage, or a larger lot size, or superior view and are comparing it to a home with none of these features, the accuracy of your estimate will be reduced. This is also true if you look at a home that is significantly larger than yours, even though all other features are equal, because a larger home will typically sell for less per sf. This is the principle of diminishing returns that states the more square footage you add the less value you get for the extra area.
Homes in Big Bear were individually built on vacant lots from back in the 1920's to the present. You have large and small, old and new, custom and basic construction mixed together within the same tract or neighborhood. As a result, the price per sq ft method of valuation is unreliable. The exception to this is the Maple Ridge tract across from the Big Bear High School, because these are similar in age, lot size, only a limited number of models exist and the design and features are very similar. There are variables, primarily limited to upgrades of exterior siding and interior finish work. This area is one of the few in Big Bear, that is similar to tract housing, found down the hill.
Price per sq ft may be a good indicator of value for tract housing. Appraisers however, are required by lenders to select recent sales "comps", in close proximity to the house being appraised, with as many similarities as possible. Instead of calculating price per sq ft for these comps, lenders require that each sale be adjusted for differences, including, lot size, view, quality of construction, condition of improvements, bedroom/bath count, living area, garages, etc. The appraiser is required to be geographically competent and to have researched the area regarding market reaction (how buyers react) to these differences and make adjustments accordingly.
I hope this sheds some light on how appraisers estimate value and why they don't rely on price per sq ft. If you have any questions, I will do my best to answer them. I can be reached at 909 866-4225.