One of the most common ways people use to determine if a condo price is “fair” is by looking at the price per square foot. Is it actually a reliable measure of value?
We decided to look at an actual building and actual units to get the answer.
The building in question is 120 Bayview Avenue, located in Toronto’s Corktown neighbourhood. We did a detailed dive into the sales that took place in the building over the past 30 days. Here’s what we found.
Seven Sales, Seven Data Points
Let’s start with the dataset.
The building had seven sales from April 26th to May 21st.
- Three 1 Bedroom, 1 Washroom Units
- Two 1 Bedroom Plus Den (1+1), 2 Washroom Units
- One 2 Bedroom, 2 Washroom Unit
- One 2 Bedroom Plus Den (2+1), 2 Washroom Unit
We pulled the MPAC Residential Detail Report for each of these sales in order to get the exact square footage of each unit. The sizes ranged from 488 sf to 891 sf.
When we look at these seven sales, we can calculate some averages for the building.
- The average sale price was about $700,000.
- The average maintenance fee per month was $541
- The average square footage was 635 sf
- The average price buyers paid was $1,121 per square foot
We’ve talked before about the danger of relying on averages when looking at specific properties so the question here is whether these averages are actually useful to use when trying to assess value. Let’s get into the one we’re focusing on in this article, the price per sf.
See that tile right there? It’s worth about $1,100.
The average price per square foot amongst the seven units was $1,121. A common approach when people (both Realtors as well as the general public) look at a condo building’s sales is to take the average price per square foot and apply it to a unit for sale to see if the list price is “fair” or not.
It’s an appealing approach because it’s simple.
- It’s a 500 sf condo? Then it is worth about $560K.
- That 700 sf condo? You shouldn’t pay more than $785K.
- The 1,200 sf penthouse? Probably should sell for about $1.35M
We get why it’s appealing, but is it accurate? The chart below shows our seven sales.
Let’s unpack what this chart tells us.
Nobody is actually average
The price per square foot may be $1,121 on average, but the actual sale prices range from $999 per sf all the way up to $1,239 per sf. The highest price per sf was paid for a 1 bedroom, 1 washroom unit. The lowest price per sf was paid for the 2 bedroom, 2 washroom unit. That unit happens to be the largest unit that sold in the past month.
Does that mean that the bigger the unit, the lower the price per sf? Not always. The 2nd largest unit sold for almost $100 more per sf than the largest unit, at $1,091 per sf. On the opposite side of the scale, the unit that received the highest price per sf was one of the small 1 bedroom, 1 washroom units, but it wasn’t the smallest one.
If anyone used the averages to try to predict what these units “should” have sold for, they wouldn’t have got it right for any of them. The percentages on the far right is what we get when we compare each unit’s price per sf against the average price per sf of $1,121.
The sale price per sf ratios ranged from 89% of the average to up to 111% of the average.
That’s a 22% range. Twenty two percent.
If you used the average price per sf for this building to assess what a unit should be worth, you could be way off what people are actually paying. You could miss out on a good opportunity for a unit that the simple math says is overpriced per sf, and you could also overpay for a unit that seems to be a reasonably listed price.
Garbage in, garbage out
There is a pithy expression used in analytics, which is “garbage in, garbage out”. It refers to the validity of the dataset and if you populate a database with unreliable or incomplete data, the analysis you generate will also be unreliable or incomplete.
While price per sf feels like a useful tool for people to judge the value of a property, it is a blunt tool that fails to take into account differences in individual units. Our review of these seven sales shows a number of factors other than square footage could have impacted the sale price. Looking at just one factor can lead to the appearance of a clear relationship between it and the price when the reality is much more complex. Here’s a few examples of what you could infer from this dataset.
- The three highest price per sf sales in the building all had no parking. So, parking is worthless.
- The four lowest price per sf sales in the building all had two washrooms. That extra washroom dramatically drops how much your unit is worth.
- Three of the four lowest price per sf sales in the building have dens. You could argue dens hurt your value, except that the lowest priced per sf sale didn’t have one. That’s a head scratcher.
As you can see, if you look at just one factor and try to infer a direct relationship between it and value, it can be very misleading.
Here’s what we know
We promised to tell you if price per sf is a useful tool for assessing value and at the risk of giving a simple answer to a complex question, we’re going to say, no, it isn’t. The price per sf calculation is too simplistic to be relied upon for valuing a specific unit in a specific condo building.
Our review of 120 Bayview tells us that for this particular building there may be a declining relationship between size and price per sf but it isn’t linear. You can’t say that for every 100 sf, the price per sf drops, because the 2nd biggest unit that sold is the closest to the overall average price per sf in the building. We can say that smaller units are fetching a higher price per sf and that as we get into larger units, you will see that price per sf drop.
It would be wise to consider the type and size of units in the building before you rely on the price per sf as an accurate gauge of price. If there is considerable variability in the composition of the building (some tiny, some large, some with parking, some without, some with balconies, some without outdoor space), it is likely that the price per sf is going to be unreliable.
If you take anything away from this article, we hope it’s that price per square foot is, at best, a sense of what is going on in the building for price. When you look at specific units to purchase, you have to consider the composition of the building and the features of the unit, not just the price per sf. If you want to work with an agent who knows how to go beyond simple math to assess real value, don’t hesitate to get in touch.