Comparing home value: Price per square foot

The price per square foot is simply the listing price of the house divided by the total square footage. For instance, a home that's listed at $400,000 and is 2,000 square feet would be $200 per square foot. You can use this number to compare the cost of similar homes in the area to see if the home you're looking at is listed at fair market value.

Requirements for measuring square footage can vary by state or even by city. Your real estate agent can let you know about the standards in your area. As a general rule, though, the square footage of a home includes only interior living spaces that are heated and/or cooled. So in most cases, you wouldn't include the garage or an unfinished basement in your calculation. You would, however, include all rooms, including bathrooms, and all closets and hallways.

If you're buying a home, the price per square foot is often included in the listing. Your real estate agent can help you determine if the measurement is accurate. If you're selling, your agent can help you determine your home's size and set your listing price so you can calculate the price per square foot.

Once you know the price per square foot of the home, you can compare it with either the median or the average price per square foot in that market. Most experts recommend using the median (the price in the middle between the lowest and highest price), because the average (all the home prices added together divided by the number of homes) can be too easily distorted by a few homes that are much higher or much lower on the price scale than the rest of the homes in the sample.

Your real estate agent should be able to tell you the median price per square foot in a given area. If your house is above the median, it could be overpriced. If it's below, it could be a good deal.

You can also compare the price per square foot to other similar homes in the area. Here is where you need to be careful to compare homes that are similar in size, condition and other features that can affect the price.

The size of a house is an obvious factor. If they have the same listing price, a large house would have a lower cost per square foot than a smaller house. But even with similar size houses, the cost per square foot is affected by the same things that help determine the listing price:

• The condition of the home. A new or newly renovated home will likely cost more than an older home that needs work.
• Lot size. A home with more land can command a higher price, especially if it includes a great view or beautiful landscaping.
• Location. Desirable neighborhoods, whether waterfront property, vacation spots or just trendy spots, are higher priced.
• Bonus features. High-end finishes, custom designs or additional structures can add value.

Because there are so many variables, if you're comparing individual homes, you need to be sure they are as similar as possible. If the price per square foot is higher or lower, first look for a reason, like differences in condition or features. If the homes are really similar, the one with a higher price per square foot could be overpriced, and the lower could be a bargain.

Comparing the price per square foot can help you avoid paying too much for a home. However, be sure to compare to similar homes and take note of differences that might make a home worth more than the average.

When you're setting a sale price, comparing the price per square foot to similar homes can help you avoid over- or underpricing. If your listing seems higher than the average or median, you may need to work with your real estate agent either to adjust the price or to be sure your listing highlights the special features that justify the higher price.