Don’t Get Hung up on PPSF

The other day I had a conversation with a friend about price per square foot, or PPSF, and why it doesn’t really matter when looking at a property.

This really struck a nerve with him.

Let me back up a moment and talk a bit more about the specific situation, and how we got here.

The Austin Real Estate Market

As the summer of 2020 ends, and the worst of the COVID-19 crisis seems to be behind us, the temperature of the Austin Housing Market can most easily be defined as a deep seller’s market.   Simply put, there aren’t enough homes available for the people looking to buy.

Normally when I would go out with a client, I would be able to show them 3 or 4 homes, and it would be easy to compare and contrast the different features, styles, and details.  After a few weeks the buyer would know the market, and what is out there and be able to easily choose a house out of several candidates.

Now, as school starts (virtually) when a client gets notified there is a new house on the market that matches their search criteria, we have to rush to get to the house quickly.  Often times, there are several other groups at the door waiting to get in.

We have to decide fast if we want to put an offer in, and when we do, it has to be very competitive.

Using PPSF to Analyze Homes

The house had all of the features they wanted.  But, the flooring was not to their taste, and the kitchen was on the smaller side (there was a wall that could be removed to open it up).  Overall it was better than most things we had seen recently and they decided to make an offer.  Based on conversations with the seller’s agent we knew we had to be fast because there was a deadline and we also knew it had to be aggressive.

This particular house was just over 2,200 square feet, in Central Austin, on a large well maintained corner lot a block from a well respected elementary school.   Originally the house was a 3 bedroom, but about 10 years ago it  had a “to the studs remodel”, and a 4th bedroom was added that was basically an attached ADU.  It was built in 1977.

According to the data, there were a fair number of sold homes in the area, so it was easy to get a general trend to see what the market was doing.  But what complicated the calculations was the size of the home and the size of the lot.

You see, most homes in this area were on smaller lots, and also were smaller in size.  Many had been updated so the finishes inside were the same, or at least comparable.  Almost none had a bedroom with a separate entrance.  But this is a “hot” neighborhood, and some homes sold for up to 111.3% over asking price, the first few days after coming on the market (Low Days on Market).

For me, the PPSF, or Price Per Square Foot value is best used when comparing apples to apples.  New construction where all the homes are relatively the same, or condos where many of the units are very similar.

In older neighborhoods, where there is a large variety of very different homes in different levels of condition, the PPSF model doesn’t hold up.

PPSF Factors

I think the biggest factor to consider when looking at price per square foot is the size of the lot. Here in Austin, people tend to prefer larger lots. More space. So larger lots sell for more. If there is a small house on a large lot with a higher price, the price per square foot will be very high. Alternatively, the opposite is true, for larger homes on smaller lots, like this one.  Price per square foot doesn’t directly take into account lot size.

Secondly – the finish inside the house has a lot to do with the price per square foot. Older homes with outdated finishes, tend to have a lower price per square foot, while updated homes with luxury or high end finish outs sell for a higher price.

Another thing to consider is the actual measurement of the house.

Would you believe there is no standard way to measure a house?

Some measure the outer perimeter to get the number of total square feet?  Others measure the internal dimensions of each room and add them all up.  Do you count only the air conditioned space, or are garages included.  What about closets?  How do you account for variability in measuring.  Is it from wall to wall, or baseboard to baseboard.  What if the room has angles or odd corners, or curves even?

I personally have seen one house measured 3 times and had up to 20% variability in the measurements.

Also, there are two published square foot measurements for almost every home.  Sometimes they match, but on occasion they don’t.  The first is the MLS square foot value.  I see this number trending to the higher side, because it is entered by listing agents, and they want the home to seem bigger.  The other value is in the Tax records, and this trends to be less, because smaller homes have lower taxes.  Which do you use?

Heart to Heart Conversation

In the end, the data showed that this house was already priced at the higher end of the market for this neighborhood.  I provided a reasonable range, over asking price, with some terms that would favor the seller, but told my buyers that I “felt” the house would sell for much more than my comps.

Sometimes, in this market to get the house, we have to throw out the data and go on our heart. Homes are appreciating rapidly here, and I don’t see an end to this anytime soon.  If you ask me (and you are reading my blog) this is a good thing for investors.  Yes, it means the barrier to entry is higher, but the appreciation is worth it.

I don’t believe we are in a bubble, it’s just simple economics -there aren’t enough homes for all the people looking. While I don’t want anyone to make a bad investment, using the term “overpaying”, is a word I downplay lately. Buy the house you love. Pay a price you can live with. Over the next few years I fully expect the value to go up,

Ultimately there were 6 offers on the house, and we didn’t get this one.  We later learned that there was one offer that “completely exceeded the seller’s expectations” and that was the one that was accepted.