I received the following question from a local Real Estate Broker tonight:
THE QUESTION: Why Do Smaller Baton Rouge Homes Sell For More Per Square Foot Than Larger Homes?
I have a client asking a question as to why a home with 1900 sq. ft. doesn’t sell for the same price per sqft as one with 2,500 sq. ft. Generally, the smaller homes go with larger price per sq. ft., BUT WHY IS THAT?
I hope this will shed some light on the why. It has to do with cost basis in that it cost more to build an equal quality smaller home than it does a larger home. I’ve added some points from 5 resources I found online to best explain this and they are quoted below.
The Cost Per Square Foot Factor
Why do smaller homes sometimes cost more per square foot than larger homes?
Smaller homes start out at a relative disadvantage to larger ones because they often cost more per square foot. That’s because every house needs certain high-ticket items, like a heating, air conditioning and ventilation system, at least one bathroom and a kitchen. As a house gets bigger, the incremental cost for these pricey items lessens.
Why Smaller Home Sell More Per Square Foot?
1.) Beyond the fixed costs cited above are such items as “impact fees”, “development fees” and the like. Cities use these to make the ultimate homeowner pay for streets, sewers, sidewalks, additional police and fire personnel and facilities, schools, etc. These are lump sum charges that apply against each lot. So, if you take a 1100 SF house with a $10,000 impact fee, that’s an additional $9.09 per foot. A 2000 SF house has an impact fee of $5.00 per foot.
2.) Land value aside….consider this. Most homes of, say, 1000 square feet are one level while larger homes are generally split level or two story. It usually costs less to built up rather than out. All homes have basic systems (heating, ventilation, electrical, and plumbing. Those basic components cost about the same for a smaller home thus contributing to a higher cost per square foot.
3.) I at one time also asked the same question? All the explanations in the previous responses are accurate but one aspect I have always wondered is the profit markup builders apply to new homes. I just walked away from considering a new home development in our Mt Island Lake area as I felt the builder’s point price is astronomical even in this hot market (Charlotte, NC). They had two ranch plans I was interested in, one at 1915 sq ft and the other at almost 2400 sq ft. The cost per sq ft went down appreciably with the higher sq ft. Economies of scale no doubt played a role in the sq footage price in materials and labor.
4.) Let me see if I can re-create the explanation from an Appraisal Institute class of several years ago. Let’s consider a 3 Bedroom, 2 bath ranch. Both homes will have the same number of plumbing fixtures and upgrades. Your first home is a 1100 SF with a single living area. The expensive items in construction are often your plumbed areas and their fixtures and cabinets, i.e.. Bathrooms and kitchens. Your distributing the cost of these out over a smaller dwelling as a whole. Now, consider your 3 bedroom, 2 bath with 2 living areas (a den and a living room) and stretch the bedrooms out a bit. Take the total living area up to 1600 SF. What have you added to accomplish a larger home? Basically, you’ve added foundation, carpet, trusses, shingles and drywall. This less expensive addition of living area has lowered your cost per square foot.
5.) Add to that, generally speaking there is a larger pool of potential buyers who can afford smaller homes versus those who can afford larger ones, so the demand tends to drive the price per square foot a little higher. If you are in a typical neighborhood with similar lots and lot values, the lot value is a constant value. Therefore, a smaller home say 1500 SF at $120,000 with a $30,000 lot sold for $150,000 or $100.00 a foot. However, the home next door has a 1,800 SF house at $144,000 with the same $30,000 lot sold for $174,000 or $96.67 per foot.
I thought I would expand on Shane’s answer. The reason this does not work is that every area has a price ceiling. Meaning that no matter how big a house is, people will only be willing to pay so much to live in that area. For example: If a 1000 sq ft home sells for $300 per sq ft, or $300,000. This does not mean that a 3,000 sq ft home will sell for $900,000. What you find is that larger homes will almost always sell for less per square foot than a smaller home all other things being equal. Hopefully this clarifies your questions. Best regards, Eric Soderlund
Making Adjustments for the size of the home
Just as a large tract of land invariably has a lower price per acre than a small tract of land, a larger home (all things being equal) will usually have a lower price psf than a smaller home. Is this a fact set in stone? No, but I’ll bet dollars to donuts if you see two homes of similar finishout quality sitting next to each other on identical lots, where one is 5,000 sf and the other is 3,000 sf, the 5,000 sf home will sell for a substantially reduced price psf.
You have to take the sizes of the comparable homes into consideration when you are trying to establish a value. If you don’t make that adjustment, you are probably going to have either a large home which is priced too high or a smaller home which is priced too low. And neither is a good thing for your seller.
Is it true that smaller houses sell for more money?
There is a very good reason that smaller homes are higher $/sqft than larger homes.
Larger homes usually have proportionately more “easy to build” space. In other words, a larger percentage of the house is bedroom, dining, and living space, which are cheap to build. The expensive rooms in a house are kitchens and bathrooms. Since every home has a kitchen, having a smaller house doesn’t save you as much as you would think. By making the house smaller, you got rid of more of the cheaper space. In other words, just to put some arbitrary numbers out there, a kitchen might cost $1000 a sq. Ft. To build, while a living room might only cost $50 a square foot to build. By making the house smaller, you get rid of a lot more of the $50 than you do of the $1000, making the average higher. Same thing with bathrooms. Also, even if the bathrooms and kitchen get smaller on the smaller house, some things can’t be cut out. No matter how small the house, you are still going to have plumbing for sinks and bathtubs, so those become a larger percentage of your cost, which drives up the price/sq.ft.
If there is one house that, as you say, is $500k for 1500 sq.ft (by the way, OUCH!), and another for $500k for 2500 sq.ft., you have to ask #1, why the difference? Better location, more amenities, more upgrades? They aren’t comps, but why not? And if there is no substantial difference, then the answer to your question is that the house is clearly overpriced and you should NOT pay that much. But if you are basing “comps” purely on $/sq.ft, you are going about the process incorrectly. Many things factor in. If the house has lots of upgrades and is in a nicer area, it is worth more money, in general. We build houses, and people call us up all the time asking how much per square foot we charge to build a house. We laugh and tell them it doesn’t work that way. Depending on what they put in the house, and where, we can build them a 1500 sq.ft house for $130k or we can build them a 1500 sq.ft. House for $500k.
Bill Cobb, Appraiser
Accurate Valuations Group
Accurate Valuations Group
Staff: Lisa Cobb
Mailing Address: P.O. Box 40515, Baton Rouge, LA 70835-0515