We often have borrowers mistakenly believe their properties are worth much more than they are because they employ a “price per square foot analysis” that is not always accurate.
If comparable sales involve similar sized homes, of similar age, on similar lots, then a “price per square foot analysis” works.
But, if a 1,400 square foot home on a 2/3 acre lot sells for $900,000 in Alamo, Ca (at a cost of $642 per square foot), that does not mean a nearby 3,000 square foot home on a 1/3 acre lot is worth $1.9 million ($642 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 $200,000 in Richmond, CA (at a cost of $200 per square foot), and then adds a 2,000 square feet addition, his house will not suddenly be worth $600,000 ($200 x 3,000 square feet). Prices in the neighborhood may likely “cap out” at $350,000 or $400,000, making the large addition effectively “worthless” at some point (otherwise known as functional obsolescence).
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