As home prices in our area continue to hit record highs, how do you, as a buyer or seller, measure the value of one particular house in relation to others? The common method is called the “market comparison approach.” Professionals look at “comps” to evaluate how to set an asking price and to assist buyers with what to bid on a home offered for sale.

There is another method — looking at the price per square foot (ppsf) — that is very useful, but seldom discussed. Understanding the relative cost, based on the actual size of the property, could be the difference between making a wise or imprudent buying/selling decision.

Although using comps remains the best item in our pricing toolbox, studying how much buyers are paying per square foot is definitely worth the effort. I have shared this information with clients throughout my career and it has helped give them an additional perspective.

 It helps to compare properties of different sizes in the same neighborhood

 It gives us a sense of how location effects price for homes of similar size and style

 It gives a picture of how much people are willing to pay for “fixers” in very poor condition

 It allows us to document pricing trends over time

Examining prices for the most expensive new homes in prestigious and desirable locations will give you an idea of what buyers are getting for their money. At the start of 1997, there was a confluence of newly rebuilt luxury homes after the Oakland hills fire and the beginning of a still unabated seller’s market.

At that time, million dollar sales were few and far between. Today, it is a different story. At the end of 1996 and into 1997, of ten high-end new homes sold in the best Oakland areas, the highest ppsf was $278, the lowest $166 and the median $230.

In 2002, a review of 25 MLS listings of new, or almost new, houses with closed prices of a million dollars or more shows a high ppsf of $450, a low of $196 and a median of $312. Many of these are on smashing, San Francisco Bay view lots. Only three of the most expensive new properties in our market exceeded $400 ppsf.

The way I explain this to clients is that, today, the most exclusive, new homes, with all the bells and whistles, are being sold at a ppsf of slightly over $300. Taking this into consideration, we can now look at how much people are paying for older homes in good areas, but nowhere equal in either location or quality of construction.

Before 1997, it was unusual for older homes to sell as high as $300 per square foot. A quick year-to-date search of the MLS for popular, Oakland zip codes reveals buyers commonly pay in the $300s ppsf, a number in the high $400s, and some in excess of $500. This phenomenon is equally true in the Berkeley to Kensington corridor. In my opinion, alarm bells should sound when the ppsf goes over $400.

My point is not that you have made a dreadful mistake if you paid a high ppsf. You might have purchased a charmer on an exquisite lot that has been tastefully remodeled. Sometimes an older property with an abundance of character has been reborn with new systems: foundation, roof, heating, electric, plumbing, sewer line, driveway and seismic retrofitting. In this situation, assuming the home’s charisma has been kept intact and the location is highly regarded, the price can be justified.

If, on the other hand, you are considering paying a princely ppsf for a small house on a tiny lot in a good, but not great location, maybe you should think again. This is especially true if you are purchasing “As Is” and buying problems that will cost you even more after close of escrow.

What conclusions can be drawn from carefully scrutinizing the price people are paying per square foot? One could be that those buying high-end homes actually get greater value for their dollar.

Conversely, some of those in the “affordable” $450,000 to $600,000 range may be paying more than a prudent buyer would if he understood value based on ppsf. The problem is an abundance of buyers for the relatively few properties in this price range. Consequently, bidding wars push prices to stratospheric levels.

In the end, how much to ask for your home if you are selling, or the amount to offer if you are buying, is your business. Nonetheless, with so much money at stake, doesn’t it make sense to use the ppsf variable to help you make the right decision?

Related Articles: Pricing by the Square Foot Revisited, How to Buy Value and Pricing in a Rapidly Rising Market