Cost per Square Foot: Not the Right Indicator

Learn how to measure the Value of a Home-based on Other Factors. With new regulatory changes like the passing of RERA (Real Estate Regulation and Development) Act of 2016, the Indian real estate industry is going through a transformation. Further, there are hundreds and hundreds of builders all across the country. Hence, real-estate investing is complex and multi-factorial. While making a realty investment, it’s highly critical that you focus not just on the cost of the property, but the overall value that is being offered. Is comparing two properties based on the cost-per-square foot the right approach? This is a question that is often-repeated in real-estate circles. As with other things in life, the easiest solution is not always the best one.

Firstly, What is Cost-per-square foot?

Let us take an example, if the cost of a 1200 square foot the flat is 75 lacs, the cost per square feet calculation is Rs. 6250 ( Total Cost/ Area of the Property).

Builders use this value in all their marketing materials and property buyers compare the cost per square foot while evaluating properties to purchase. For example, you may have seen some builders advertising for their property, inviting you to- Buy 2BHK starting @3500 sq.ft all Inclusive.

Why Cost per Square Foot is a Misleading Measure?

There’s no doubt that the cost per square foot is a useful metric to help you learn the price of the property however it does not shed light on the cost of the particular city, or neighbourhood. This stand-alone data is inconclusive and should not be the only deciding factor.

The value you are getting from the price you are paying is a better yardstick instead of just the cost per square feet. Let us explain this with an easy-to-understand example. Say, you’re looking to purchase a new smartphone. You have a wide range of smartphones ranging from 10k, 15k all the way up to 1.35 lakhs and more. Choosing an entry-level smartphone in the range 10-15k is not a good value for your money proposition. This is because these smartphones are likely to face issues like overheating while charging, no customer support from the brand, shorter lifetimes, etc.

On the other end of the spectrum, you have expensive branded phones like the latest Apple iPhones, Samsung Galaxy and Note Series that cost you a pretty penny. While these phones offer high-end specifications and amazing brand value, they still are not the best value for your money.

Now, this brings us to another category of phones like the OnePlus. These phones have excellent features just like high-end phones but without the exorbitant costs. They offer the best value for your money – an excellent performance like high-end phones, minus the problems of entry-level phones.

Now, which is a smart choice? Should you spend 10k – 15k on an entry-level phone and face troubles just a few months down the line, or spend a few thousand more and get a mid-range phone that offers the better value for money?

It’s obviously the latter. The same applies when comparing real-estate properties based on the cost per square foot.

Now, let’s apply this analogy to evaluating real estate properties. Just like you wouldn’t look at just the price of a smartphone (you consider features, specifications, brand value, value for money, etc.),

While comparing real-estate properties don’t just look at the cost per square foot.

Let us illustrate this with an example. Consider two upcoming projects in the same neighbourhood, Project A and B. Project A is spread across 20 acres and has 2000 housing units in total, with each unit costing 38 lakhs. On the other hand, Project B is spread over 15 acres and has 4000 units in total, with the price of each unit at 25 lakhs.

If you were to decide solely based on the cost per square foot, then obviously Project B seems like a better choice. On the other hand, if you consider other factors like – available green space, value-added amenities like club house, recreation activities, security, etc. then Project A is undoubtedly the better choice and offers more value for your investment in the long run.

Now, let’s take a look at the cost per square feet dilemma while selling. Let’s say there are two apartments both measuring 2000 square feet, 5-years old and located in the same neighbourhood.

Project A has the following amenities:

• Club House, Jogging Track

• Kids Play Area, Cricket Pitch, Basketball Court

• Intuitive well laid-out internal design with plenty of fresh air and natural light

• Is part of a gated community with CCTV, 24X7 security, several amenities recreation centres and more.

Project B has the following:

• Hardly any Open areas

• None or very small kids play area

• Belongs to an apartment community that is not properly maintained

Which property do you think will fetch the most prices per square foot while selling? There’s no doubt – it’s undoubtedly Apartment A.

Customer Centricity: The biggest purchase decision you will make in your life is a house. While making this decision look at the builder. Understand their processes and evaluate if they have a customer-centric approach. You would not want to get in a situation when you are stuck and the builder does not seem to care about its customers.

Harshit, an IT professional in his mid-30s is one such real estate buyers for whom the process of purchasing their dream home left them with a bitter experience. Here’s what he has to say, “I was excited when I came across a property for sale in Noida in my preferred locality. Though it was advertised as a ready-to-move-in property, I haven’t been able to take possession of it for the last four months.

Even though I have been making frequent visits to the builder’s office and making endless phone calls with their team; there is no progress. The builder’s management team is of no help, and it feels like I am being tossed back and forth between their various departments.

From a financial perspective, my family and I are staying at a rented property in the outskirts of Noida. I have paid around 50k as rent in the last four months, and not to forget the tiring and expensive commute to school for my kids and a longer commute to my office. Further, both my wife and I have been taking days off from work to meet up with the builder, check the progress of construction, all of which adds to our financial woes.”

Even after doing all this, Harshit is not confident that he would be able to take possession of his dream home in the next couple of months.

In examples like the above myopic view of not thinking beyond cost per square foot and ignoring the customer centricity of the buyer could really hurt you in the long run.

Pro Tip: Visit the builder’s website and see if they have a care/customer support section or not. Try calling or sending an email to the support team to see their response time. Additionally, you can visit the builder’s social media pages as they reflect their organisational values and persona. This should be amongst the most important qualifiers before making the purchase decision.

The Cost per Square Foot – Not the Only Factor to Consider

Using just cost per square foot to compare properties is like comparing apples and oranges.

These examples illustrate that there’s more to the value of the home than just cost per square foot. There are plenty of variables to consider like – builder’s reputation, amenities offered, location of the property, support for the buyer (post and pre-sale), etc.

You cannot generalise properties based on the cost per square foot. While the cost-per-square-foot gives you an idea of the average or median property prices in an area, it doesn’t give the actual value of a property.

So, while evaluating properties make sure to consider several other factors and don’t get mislead by the cost per square foot quoted by builders. Get into the finer details. Consider the value of the property in the long run, whether it’s worth the investment and do your homework before choosing a property to buy.