Why Are Big Homes Less Per Square Foot Than Smaller Homes?
A common error folks make is thinking that they can apply the average Dollars per Square Foot for a given neighborhood to all sizes of homes. Here’s the math:
You have two homes side-by-side on the same size lot. One is a smaller home – 1,500 SF. Next door is a larger home – 3,000 SF. You would think the bigger house is twice the price, but it’s not. Why is that?
The real calculation is separating the lot value from cost to build. Let’s make our two houses brand new, and let’s say the cost to build is running $300/SF. So, the 1,500 SF house costs $450,000 to build, and the 3,000 SF house costs $900,000. However, the lots are the same value. Just because the second lot has a big house on it doesn’t make the dirt more valuable.
Let’s say the two lots cost $500,000 each. Now the small house is $450,000 plus $500,000 or $950,000. And the big house is worth $900,000 plus $500,000 or $1,400,000.
Look at what happens to the price per square foot: The small house is now priced at $950,000 divided by 1,500 = $633.33 per square foot, and the big house is $1,400,000 divided by 3,000 = $466.67 per square foot. The big home is less per square foot than the smaller one.
— Joseph