Price Per Square Foot: A Useful Metric in Negotiations
There are several methods professional Realtors utilize to “value” property (as opposed to how appraisers actually value property), and the methods are not mutually exclusive; each method has a benefit for determining whether a seller has accurately valued their home, which provides excellent leverage when it comes time for negotiating. The first method (after the actual listing price) most realtors will utilize, is determining the cost per square foot compared to the cost per square foot of similar homes in the area (or the median cost per square foot in the area if there is a massive standard deviation in the sample they draw their data from).
As a general matter, most listings display the cost per square foot (online and on information sheets, which are typically provided at open houses); this information is nice, but is utterly meaningless without a comparison to other nearby houses (you wouldn’t buy a T.V. for $1,000 just because BestBuy says it’s worth $1,000 – you’d check other stores to see if that’s a good deal). If you want to do your own homework, type in the location’s information on a reputable website, and look for the cost per square foot of other homes in the area (as noted above, the median cost is useful in areas with a large range of prices).
If you don’t know the difference between the median and mean (average) price, we are here to help; the mean (average) is simply the total price per square foot data points (add them all up), divided by the total number of data points (how many houses did you draw the price per square foot from?). The median takes the total number of data points (see above) and finds the value that is exactly in the middle (in a sample of say 7,6,3,2,1 the median would be 3, while the mean would be 3.3).
Now that you know the median cost per square foot in the area you are looking at (we recommend Sherman Oaks, Encino, and Studio City), it’s time to use that information at the negotiating table. If the price per square foot is noticeably higher than the mean for the area, chances are the property is overvalued; this means you are occupying prime real estate for negotiations. It’s possible this house has things that make it more valuable than neighboring properties, but if it doesn’t that house will likely sit on the market for a long time because it’s overpriced (this is very bad for a seller). You, the expert negotiator you are, could point out that the seller could risk their house staying on the market for a long time in the hopes that they receive their asking price or they could come down to a reasonable rate (a number you know because you did your homework) and sell their home now. An important point to note here is that smaller homes generally have a higher price per square foot than larger homes so it is important to compare similarly sized homes.
At the Chernov Team we understand that knowledge is power, and knowledge of how the pros go about valuing property and negotiating deals in powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.