Price Per Square Foot Can Obscure a Home's Real Value

By Katherine Salant
Saturday, April 7, 2007

Many people who look at a production builder's furnished model home ooh and aah about the floor plan -- it feels so big and open. They fixate on the floor finishes: This Brazilian cherry looks almost edible. They gape at the beautiful kitchen countertops: My friends will be jealous; at the big rooms -- this bathroom could fit 20 of my best friends; and at a host of other details.

But in the end, it comes down to price. Most home buyers want the most space for the least money because, after all, we're a nation of bargain hunters.

Buyers don't determine value on price alone, however. The gold standard for assessing value is cost per square foot. The builder with the lowest figure is seen as the one that offers the best deal.

Unfortunately, home buyers' insistence on evaluating quality in terms of cost per square foot has had consequences they don't appreciate, according to Ron Jones, editor of Green Builder magazine and a custom home builder for more than 25 years.

"Buyers value the dollar per square foot, and the builder responds by delivering as many square feet of conditioned space as possible for $X. If he can deliver 100 more square feet than the competition, most buyers think it's a better value," Jones said in a recent interview.

"But the problem with this is that the more square feet that are added for a given price, the less . . . quality per dollar for performance of the house. The quality of finishes, appliances, mechanical systems and the building envelope suffers. If the builder has set the price at $200,000, for example, he will have to dilute the quality," Jones said.

"Builders concentrate their energy where their buyers will compare -- generally the kitchen, the master bathroom, bedroom count and overall square footage.

"For those things least familiar to consumers, a builder takes the path of least resistance and installs the bare minimum in performance and warranty. For example, he chooses the cheapest appliances and [specifies] an electric water heater over gas because it's less expensive, but it doesn't perform as well and costs more to operate. He [specifies] an electric range because it's less expensive than gas, though most people prefer gas. With appliances, the brand is likely to be one the buyer recognizes, but the model the builder provides will be a less-expensive builder grade. With other items, such as windows, a builder will use a no-name brand.

In terms of useful life, "if the standard of the home builder industry for a particular item is five years and it is not a selling point for buyers, there's not much incentive to offer a longer one."

Even though they acknowledge that the cost-per-square-foot figure is the coin of the realm, many builders say they resent being judged by this criterion. They point out that value depends on what is in the square foot. If they use higher-quality materials than their competitors, they will have a higher cost per square foot, but they are also selling a better house.

That is the argument made by Allan Waschak, a small custom and production builder working in the Washington and Baltimore areas.

"As a small, local builder, I can never beat the big national guys on price -- they can buy materials by the trainload, and they get a steep discount on everything. My prices are higher, but a second- or third-move-up buyer who has owned several houses recognizes the subtle differences in my houses," Waschak said.

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