In 1995, I represented a seller who had, four years earlier, paid $180,000 for an 821 square foot home that he sold for $150,000. He had to bring to escrow a check for over $20,000 to close the transaction. That house, with no significant improvements, today sells for $400,000, approaching $500 per square foot. This is an example of the type of property that has the greatest potential for loss if the market gets soft.

Using price per square foot (ppsf) is a highly valuable, but underutilized, tool for clarifying reality. Analyzing ppsf before you buy could prevent you from someday writing, rather than receiving, a check at closing.

Prices have risen astronomically since the beginning of the year. Many real estate veterans, including myself, cannot remember a more pronounced price run-up in such a short period. Although few would dispute this, especially hordes of home shoppers bloodied by multiple bidding shootouts, buyers and sellers need a gauge of how overheated the local market really is.

Two years ago, I wrote an article entitled, Pricing by the Square Foot. At that time, good properties in desirable areas commonly were in the $300/ppsf range; $400/ppsf was riskier and less frequent; and, $500/ppsf was top of the market.

To get a sense of how those ppsf categories compare to today's prices, I again searched the most popular Oakland zip codes for year-to-date closed sales of $500,000 or more. Although square footage from the Multiple Listing Service or county records is not always accurate, we can get a good idea of pricing trends from them.

The ppsf ranged from a low of $218 to a high of $653. Twenty-nine per cent exceeded a ppsf of $400; over 10% had a ppsf of $500 or more; and, a handful surpassed a ppsf of $600. This was the first time I have seen Oakland prices break that barrier.

Many will react to this by saying, “That is the market due to scarce inventory and an abundance of buyers.” In spite of the truth of this statement, some buyers are still getting value for their money while others are not. You need a Realtor who is able to identify and explain which properties are worth the cost and which are not.

What does it cost to build a new home today? Taking into consideration that, in the El Cerrito to Oakland corridor, there are few buildable lots remaining, good ones are very expensive.

Assuming that a somewhat larger than standard, 6000 square foot, level lot, without a Bay view, was available, it would cost at least $150,000. Now imagine building a 1500 square foot home with excellent materials, finishes, appliances and landscaping. In addition, you require the house to have charm.

I ran this scenario by Ken Winfield, owner of Winfield Construction in Emeryville. Ken is well respected by the real estate community for exceptional, high quality workmanship.

Winfield estimated a construction cost to the customer of $300 per square foot, with miscellaneous costs (e.g., permits, architect and engineering fees) possibly as high as $80,000. The total for this project would be $682,500, including the lot.

You would now have a brand new, three bedroom, 2 bath property with lovely architectural details, a gorgeous kitchen, top-notch appliances and fixtures, hardwood and tile flooring, and a master bedroom suite with French doors out to a lovely redwood deck overlooking a landscaped backyard. The ppsf would be $455, inclusive. For a 2500 square foot, $1 million residence, the ppsf would drop to $400.

Paying an inflated ppsf for a house in a questionable location and needing considerable work is an unfortunate, but common, mistake in a speedy market such as ours. You end up spending a lot, yet get little bang for your buck. Before buying, look at ppsf to help you decide whether to offer and, if so, how much.

In heated competition, the majority of homes in our area are sold “As Is.” Often, you will not have comprehensive inspections and reports supplied by the seller before you write a contract. This means you will most likely be bidding up the price without a full picture of the property's condition. If you are purchasing a home that needs major work to basic systems (e.g., foundation, drainage, sewer lateral, roof), and/or requires remodeling, you could be adding $100 or more to your already high ppsf.

This is a trap into which buyers often fall. Keep in mind that, if successful, you will be buying the house and its problems. Even with expensive issues, in a hot market sellers have the leverage and are usually not willing to give full credit for repairs you discover during your inspections.

Although real estate is a fantastic investment, neither buyers nor sellers can count on prices rising forever. Reviewing and understanding ppsf can help you avoid an unhappy ending to your home purchasing adventure.

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