Mortgage Blog

What’s your Home’s Price per Square Foot?

December 18, 2014 | Posted by: Kelleway Mortgage Architects

Sounds like a party game question doesn’t it?
 

Hmm...the simplified answer is to take your purchase price (or value) of your current home, deduct the cost of the land (see your property tax assessment) and then divide it by the size of your home.
 

For example, here’s a price per square foot calculation for a Detached Suburban Home:
 

($550,000 market value - $305,000 land) / 2800 sq.ft. total floor space = $87.50 price per square foot

 

Price per Square Foot ($P/sq.ft.) and Home Insurance
 

Recently, we learned that an insurance company used the above equation to calculate the maximum replacement value of a home for insurance purposes
.

But...wait a minute...what’s the cost per square foot to build a home?  Let’s say on a serviced vacant lot in BC it costs between $120 and $130 to build a modest home, $150 per square foot to build a nice home and $200+ to build a custom home.  If that’s the case, then the replacement value calculated in the above example is too low.
 

Further, we spoke to a local builder who cautioned that even the cost of rebuilding a “modest” house (e.g., after a major fire) may be well over $200 per square foot!  Why is that?  Depending upon where the property is located, bringing an older “modest” house up to current bylaws, building codes and standards may greatly push up the cost of replacement - especially if the rebuild requires new foundation and installation of a sprinkler system throughout.
 

WARNING BELL:  Check your home insurance to see if you are adequately insured for the “replacement value” of your home and then have a conversation with your general insurance agent.


$P/sq.ft. and Building a New Home
 

Finding the lot and deciding on the type of home you want to build is the fun part.  Deciding on a financing plan is not as exciting but it will set the limits for your down payment and construction budget.  You will save much time and frustration (and avoid stressful surprises) by aligning your expectations with what you can afford.


Right at the start, consult your mortgage broker to explore your available options.    Here’s some points to consider:
1.  You will need 20% to 25% (not 5% !) as a down payment to purchase the lot.
2.  You will need 25% to 35% of the total construction cost available from your own resources.
3.  We recommend that you have available a Line of Credit (LOC) of up to 10% of the construction cost to manage cashflow between construction draws and any cost overruns.
 

If you are seriously thinking of building a new home, be realistic about the size of house you need starting with the number of bedrooms.  Also, will you be happy living in a modest, nice or custom-built home?  We advise working backwards from the estimated market value of the completed home to arrive at an acceptable construction budget based upon cost per square foot plus the cost of the lot.

Estimate your rough construction cost by multiplying the size of home by your chosen cost per square foot (i.e, $120 or $150 or $200+).  From there, estimate the amount of mortgage financing you will need to complete your project.
 

Estimate construction cost:  2000 sq.ft. x $150 cost per sq.ft. = $300,000

Estimate lot cost:  $400,000

Estimate total cost of project:  $300,000 + $400,000 = $700,000
 

In the above example, be prepared to have $175,000 on hand for down payment and finance at least $525,000 for the purchase of the lot and construction costs.
 

Then, work with a realtor to help you find a lot in a neighbourhood where you can afford to build that house and keep within your total budget.  Before buying the lot, we advise seeking a local builder’s opinion on whether the lot is suitable for what you want to build.  In order for your new home to retain its value over time, its market value when complete should fall within the range of other properties recently sold in that neighbourhood.

Another way of building a new home is to work with a builder who buys the land, builds the house with your input and then sells the property to you once an owner occupancy permit is granted.  This arrangement could involve a “pre-sale” contract and the financing is arranged accordingly.  Be prepared, however, to pay a higher $P/sq.ft. for that type of purchase agreement as the builder will expect a deposit (e.g., 10%) and compensation for carrying the liability and financing costs for lot purchase and construction.

HELPFUL TIP:  Remember your math teacher saying that you have to compare apples to apples and oranges to oranges to make sense of numbers?  Here’s a word of caution, if you want a 2800 sq ft home, make sure your realtor and builder know whether that size is based on total floor area or liveable or finished floor area.  For example, finished floor area does not include unfinished basements, garages and sometimes decks or balconies.

$P/sq.ft. and Renovating an Existing Home

The same $P/sq.ft. guidelines for building a new home apply to a large renovation project (i.e., over $100,000) of an existing home.  Again, work backwards from the estimated market value of the property to arrive at an acceptable renovation budget.  The financing options, however, may differ as it could be structured as a “purchase + improvements” or a “home equity take-out” loan.

CAUTION:  For renovations, add another 25% to 50% to your new build cost per square foot (i.e, modest=$150, nice=$188, custom=$250).  Unlike building on vacant serviced lots, large renovation projects require working with existing infrastructures (e.g, plumbing, heating, electrical and framing) that may need upgrading to current building codes - or  involve fixing hidden problems such as water damage, mould, rot, infestations, etc.

$P/sq.ft. and Buying a Move-in-Ready Home

How important is your “liveable” area when compared to “where” you want to live?  If you want a 3-bedroom home with a backyard and your total budget is $550,000, in BC you’ll be looking for something in the suburbs or less densely populated areas.  However, if a backyard is not important, then that same budget may work for a 2 bedroom + den condominium in a more densely populated urban area.

If the multi-unit developer is paying more for the land, then they will pass that cost onto buyers.  Developers tend to calculate the “cost per buildable square foot”.  Therefore, be aware that the market price of an identical floorplan for an 820 sq.ft. condo will be much higher when it is built on land that costs over $200 per buildable square foot than on land costing $100 per buildable square foot.

For example, here’s a price per square foot calculation for an Urban Condo:


$550,000 market value / 820 sq ft = $670.73 price per square foot

Wow...that’s a big difference between the price per square foot of the detached suburban house ($87.50) and the urban condo ($670.73) in our examples.  However, according to Frank Schliewinsky of Strategics in his recent Vancouver Condo Report, that pricing is realistic in his example of a:

 “1,087-square-foot, two-bedroom unit in a new highrise on Vancouver’s east side cost, on average, $705,456 — plus HST; on the west side, $768,483 for 942 square feet.” 

Respectively, the average prices per square foot on those units are $649 and $816.  Notice the difference in pricing based on location value?

$P/sq.ft. and Appraisal Value

We then asked an appraiser how he would compare properties on a price per square foot basis.  Here’s what Jason Upton of Aedis Appraisals said:

When comparing properties on a price per square foot basis, it is essential to consider the different influencing factors. The less there are, the clearer the comparison. The more there are, the more potentially confusing it can be. For instance, if analyzing Lower (Vancouver) Mainland apartments, be aware that location, age, view and elevation will all affect the price per square foot. If you filter your comparison study, it will help you isolate the value of the variable. So instead, if you compare Vancouver apartments that are of similar age and similar elevation, you will easily be able to determine how price changes from neighbourhood to neighbourhood by comparing their price per square foot.

$P/sq.ft. and Your Housing Preferences


Getting back to our party game question of “What’s your home’s price per square foot?” your answer can reveal your preferences and trade-offs in how you make your housing choices.

A relatively high price per square foot may mean you value an urban lifestyle over a suburban or semi-rural one.  A relatively low price per square foot may mean you value an abundance of living space over location or newness of construction.   

The size of your home may have little relevance to its affordability.  Above we’ve explained that a condo located in a desirable urban area may be priced the same as an expansive detached house in a desirable suburban area.

Calculating your price per square foot of where you are and where you want to be is one way of comparing your possible housing choices within desirable neighbourhoods.  There are other good questions to ask yourself before deciding on your preferred price per square foot. 

For example:

How much do you value your time spent commuting to and from work?
How many people will the home shelter?
What services do you, and/or the people who live with you, need to access often or on a daily basis?
How long do you think you will live in your home?
Will investing in this home fit with your future financial and life goals?  (You may want to consult a financial planner to help answer this one.)

In this article, we’ve mentioned several professionals who can advise you on your housing decisions, namely mortgage brokers, builders, realtors, insurance agents, appraisers and financial planners.  If you don’t know who to ask to answer your questions, we welcome you to ask us first!

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Glen Kelleway, BSc, AMP, Senior Mortgage Planner & Owner

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