Pricing a Home – Price per Square Foot

Pricing homes is often more art than science. Some of the factors that play into a recommended pricing range are nearly impossible to measure or quantify. For example, how do you put a price on location? Everyone knows the old adage that the three most important factors in real estate are location, location and location. But how do you systematically assign value to such a complex quality?

The practical answer is that we look for similar homes that have either recently sold or are currently on the market. We then make adjustments to account for differences between the properties. One day, there will be databases that can quantify what we currently consider impossible to measure, but we’re not there yet. In the meantime we visit as many properties as possible so that we can rely on basic metrics and human judgement.

Price per Square Foot ($/SqFt) is one of the most common basic metrics used to quantify the intangibles. The $/SqFt of homes often differs greatly between towns as a result of the desirability of individual communities. Perceptions about crime and schools play into the values, as do the physical characteristics of the housing stock. The $/SqFt can even vary widely within towns if certain neighborhoods or streets are highly desirable addresses.

I decided to take a closer look at how the $/SqFt varies within one particular school district in one particular town. The main question I wanted to explore was, “Could I calculate the list price of a home if all I knew was how big it was?” Here’s what I discovered about the 28 homes currently on the market in the Norfeldt school district in West Hartford.

2008-10-01-home-price-vs-home-size

As one would expect, there is much less dollar variability in price for smaller homes as there is for the larger properties. Interestingly, there are two homes that are both about 5,500 square feet that are priced about $800,000 apart. There must be a number of factors at work to produce such a large price difference.

Knowing the size of a home is a surprisingly good predictor of its list price in this particular school district. Excel reports that our very simple linear model for pricing homes accounts for over 87% of the variability. So if I had a 2,000 square foot house to sell, the model suggests pricing it at $352,570.

Now let’s calculate the $/SqFt for all these properties and see what that tells us. First we’ll look at it as a function of the home’s price.

2008-10-01-price-per-sq-foot-vs-home-price

The best fit line once again slopes up and to the right – more expensive homes tend to cost more on a $/SqFt basis. I suppose this shouldn’t be surprising since high-end properties are more likely to have luxurious extras.

The most interesting result of this chart is that there is much more variation at the lower price points. Perhaps this is best explained by my friend Alan’s observation that here in Connecticut (as opposed to The South) two adjacent homes, even though they look exactly the same on the outside, can be completely different inside due to their level of updating. His previous experience had been that all houses in the neighborhood were very nearly identical both inside and outside since they were built as part of a large, recent development.

2008-10-01-price-per-sq-foot-vs-home-size

Out of curiosity I also plotted the $/SqFt as a function of the home’s size. In this case there is very little relationship and lots of variation at all sizes. Anecdotally, it is common to see smaller homes that are impeccibly upgraded and maintained with the highest $/SqFt.

Although it is by no means a perfect metric, understanding $/SqFt is important for both buyers and sellers as a proxy for the many intangibles of real property. Buyers should think critically about whether a property in which they are interested warrants a premium price. And sellers need to consider $/SqFt relative to their competition when deciding what to ask for their home. $/SqFt will likely be one of the many supprting data points raised during negotiations – but only after buyers fall in love.

Negative Feedback Loop – Mortgages vs Investments

The financial markets are in a difficult place right now, and the Federal government is working on a plan to intervene and hopefully stop the bleeding. Rather than trying to figure out who’s to blame, or speculating on what might happen next, I’d like to try to illustrate the negative feedback loop currently in place.

Negative Feedback Loop

Some observations:
1. Mortgage-backed securities are valued using computer models with numerous assumptions. The historical data used to generate the models and assumptions is not relevant in this unique environment. So there is no reliable way to put a value on a particular mortgage-backed security.

2. Few investors want to buy mortgage-backed securities right now because they have no idea what to pay.

3. Some investors are being forced to sell their mortgage-backed securities due to ratings changes. They basically have to accept whatever bids exist.

4. Sales of mortgage-backed securities are few and far between. Yet the few that get done establish a “market value” that everyone else then has to use to calculate the “losses” on their mortgage-backed securities.

5. All of these “losses” are causing severe disruptions to the businesses of banks, brokerages and insurance companies, in some cases threatening their viability.

The big implication is that demand for real estate is down due to broad concerns about the economy and the credit environment. And when demand is down, home prices are also under pressure. That’s not to say home prices are going to decrease everywhere, (since real estate is always local) just that they are facing a headwind.

It will be interesting to see how the government plans to break the negative feedback loop. The details are still sketchy at this point, but it seems to me that they could step in at a number of points. Hopefully this will be the beginning of the end of the current credit crisis, but only time will tell.

I'm Thinking About Looking for a Tenant…

Boat BuildingIn today’s “difficult” market, sellers often consider renting their home if their property does not sell shortly after being listed. We’ve worked with a number of folks that have asked about, and even tried, the rental option, with a wide range of results. Each time the topic comes up we evaluate the unique factors in the situation rather than giving a standard one-size-fits-all answer.

Sellers initially consider the rental option because they want to get the most they can for their property. This is a natural desire, and one that we whole-heartedly support, since our job is to sell their property for as much as we can. The thought is that perhaps if the home is rented for a year that the market will have time to recover and can be sold for more next year.

Here are some thoughts about renting instead of selling:

1. Nobody knows what the housing market is going to do in the coming year. There are a lot of factors that play into home prices (availability of mortgages, percentage of buyer budget available for housing, consumer confidence, local economy, …) which even the brightest minds don’t pretend to understand. We can give a range of what a home will sell for in the current market, but there is no way to accurately predict the value of the home next year.

2. Being a landlord can be a lot of work. We own a rental propety and have a sense of what it takes to be landlords. The effort level is very erratic with short periods of high-priority tasks (finding a tenant, responding to issues) mixed with long periods of clear sailing. When an issue comes up it requires your immediate and complete attention. Your ultimate goal is to sell the property in the near future, so you want it to remain in good condition. Which leads right into the next point.

3. Tenants don’t maintain homes as well as owners. They have no real investment at risk (other than their security deposit), so there is no built-in incentive to take care of the place. Most tenants are very responsible and do their best, but it’s just not the same. Once the year passes and it’s time to put the property back on the market the home will not show as well as it does right now.

4. Many folks are not able to command enough rent for their peoperties to cover all their costs. In addition to the mortgage payments (mortgage, taxes, insurance), there are also maintenance costs (repairs, lawn, snow, …) and the time and travel required to actually oversee everything.

5. Finally, there have been more houses than usual rented over the past year. Some owners are trying to time the market. Others are in financial trouble, and have to choose between bringing money to closing or continuing to struggle to make their mortgage payment. They don’t have enough money to sell, and they can’t afford to stay, so they choose to find a tenant for their home and then go rent a less expensive place for themselves. Either way, there are more homes than usual waiting for the market to turn more favorable. And when it does, there will be more homes than usual for sale, creating excess supply.

Renting a home can be a viable alternative to selling if the circumstances are right. Among our clients, one was able to sign a six month lease, successfully covering their carrying costs while waiting for the seasonally more active spring market. Another client’s location was far more attractive as a rental than anything else, which worked out fine because they were comfortable being landlords.

In summary, renting can seem like an attractive option to sellers not getting the price they want. However there is much more uncertainty (risk) than most initially believe. Consider the above points and talk it over with your agent before pulling the trigger.

Hartford's Asylum Hill – An Auto-Free Option

The Asylum Hill neighborhood doesn’t get as much attention as some other areas in Hartford. For those not familiar with the city, Asylum Hill is a Hershey Kiss shaped neighborhood bounded by the streets of Sargeant on the north, Woodland to the west and I84 to the east and south.

Asylum Hill, Hartford

Having riden the bus down either Farmington Avenue or Asylum Avenue nearly every day over the past four years, I’ve gradually realized that Asylum Hill is perhaps the only neighborhood in Greater Hartford in which a resident could legitimately survive without a car.

Aetna SignFirst and foremost Asylum Hill has plenty of easily accessible job opportunities, with major employers like The Hartford, Aetna, St. Francis Hospital, and the Connecticut Culinary Institute all within walking distance. Beyond those institutions, there are numerous small businesses lining the two major streets. Folks willing to ride the bus can get to downtown, West Hartford Center, Westfarms Mall or the CIGNA campus in Bloomfield without needing to transfer.

Green Apple

The second critical factor is that residents can shop for the supplies they need on a day-to-day basis. With the opening of the Green Apple market on Farmington, residents are now able to get fresh fruits and veggies on a consistent and reliable basis. Other small markets and convenience stores are scattered throughout the neighborhood. There are a number of other eateries and specialty shops on Farmington, and even a few fast food options. Household items may be more difficult to come by, requiring a half-hour bus ride out to the Westfarms area. Perhaps this is the time to mention that the neighborhood is very centrally located in the region, with excellent highway access. So convincing a friend with a car to take a quick trip to wherever should not be a problem.

Hartford ConservatoryThe neighborhood also has an impressive collection of cultural and community institutions. The Mark Twain House, Harriet Beecher Stowe Center, and Children’s Theater are all clustered on Farmington, with the Hartford Conservatory on Asylum. A number of churches, some of the most beautiful in the city, have prominent positions in the neighborhood. The recently renovated Hartford Public High School serves as a focal point in the community, and there is are a number of community gardens tucked in empty lots.

Asylum Hill HomesFinally, there are a wide variety of residential options. Many of the housing choices are either apartment or condo units in multifamily structures. Much has been made of the very visible and recently halted project that David Nyberg is doing on and around Imlay Street, and there appears to be other renovations underway elsewhere in the neighborhood. The northern part of the neighborhood has more single and multi family properties, though there are also plenty of options in larger buildings.

 

Asylum Hill is a complete urban neighborhood with jobs, retail, culture/entertainment and housing together in a walkable community. It’s time they got the recognition they deserve for being the best available option for the auto-free (or auto-light) lifestyle in Greater Hartford.

West End Sidewalk Update

This morning I visited the Hartford Department of Public Works to get the latest on the city’s sidewalk review. The bottom line is that a new round of sidewalk notices are on the way.

We’ll start with a quiz – can you spot the violation in this section of sidewalk?

As a quick recap, Hartford homeowners are responsible for maintaining the sidewalks on their property. The city is responsible for ensuring that homeowners maintain their sidewalks and use the notification process to do so.  Ultimately, the city has the right to send a contractor out to make repairs and then put a lien on the property in the amount of the cost.

Let’s do a little Q&A to address the main questions that I had about the process.

Q. What constitutes a violation?

A. All sidewalks need to conform to the Americans with Disabilities Act (ADA).  Some of the regulations include a 4 foot width and no horizontal or vertical gaps of more than 3/8ths of an inch.  Additionally, the surface of the sidewalk can’t be cracked or delaminated.

Q. Who evaluated the sidewalks?

A. The Department of Public Works sent a team out this summer to take a look at the West End.  The city is under pressure from the Justice Department to bring the city’s sidewalks into compliance.

Q. How will I know if I receive a notification?

A. The results from this summer’s survey are still being entered into the computer system, so we will likely get letters in the mail in a month or so.  They’ll look like this except that they’ll have your address and the number of square feet of sidewalk that will need to be replaced.

While visiting the Maps & Records office, I also learned that there is a public computer available to look up existing sidewalk notifications.  Although our house does not have any legacy notifications, lots and lots of homes on our street have one or more.

Q. What do I need to do if I get a notification?

A. In the City of Hartford, only licensed and bonded contractors are authorized to make sidewalk repairs.  The city has the list at the Department of Public works of about 45 contractors authorized for curb and sidewalk repairs in 2008.  Once you hire a contractor, they will take out a permit and the city will inspect the work.  The notification is cleared only after the city completes the inspection.

Q. How long do I have to make repairs?

A. The notification will have an expiration date.  My sense is that we’ll get about 3 months to make repairs, though we’ll know for sure when we receive the notifications.

Q. What if I don’t make repairs?

A. I honestly don’t know, but there were still notifications from 1997 in the computer.  Sidewalk notifications could become an issue if you tried to sell your home and the buyer discovered there was an open notification.

Q. Can they make me replace my slate with concrete?

A. They can make you replace damaged slate.  They can make you realign your slate.  Previous battles over the slate apparently resulted in protection for the West End slate (everywhere else in the city is apparently required to replace slate with “approved” materials).  At the end of the day, the city would prefer to see the slate removed because its open joints require more maintenance.

The only issue seems to be whether or not any of the approved contractors are willing to work with slate because they have to guarantee the work for 5 years.

Q. How does the MDC project play into the city’s effort?

A. The city’s recent survey is completely independent and unrelated to the MDC project.  I didn’t have an opportunity to discuss the interplay between the two efforts, but will do so once we learn more about the MDC’s plans this fall.

So those are the main points from my visit.  Please feel free to post questions in the comments section and I’ll do my best to address them. 

Additionally, Duane Roberts of the Department of Public Works was very helpful and graciously agreed to allow me to post his contact information so folks could call directly with questions.  Duane can be reached at 860-522-4888 x6589.  Their office (with the computer to look up notifications) is on the second floor at 525 Main Street downtown.