If comparable sales involve similar-sized homes, of similar age, on similar lots, then a “price per square foot analysis” works. But, if a 1,200 square foot home on a 2/3 acre lot sells for $1,100,000 in Alamo, CA (at a cost of $917 per square foot), that does not mean a nearby 3,000 square foot home on a 1/3 acre lot is worth $2.75 million ($917 x 3,000 square feet). The value of the lot must be taken into account, rendering a cost-per-square-foot analysis inaccurate.
Likewise, if a borrower buys a 1,000 square foot house for $300,000 in Richmond, CA (at a cost of $300 per square foot), and then adds a 2,000 square feet addition, his house will not suddenly be worth $900,000 ($300 x 3,000 square feet). Prices in the neighborhood may likely “cap out” at $500,000 or $600,000, making the large addition effectively “worthless” at some point (otherwise known as functional obsolescence).
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
