Council of Home Measurement Specialist
The real, real estate crisis - the information crisis...
So, how much does square footage really matter? Can it really make that much of a difference? Let's look at one real-life example of how "size" influences value, and see just how much consumer protection is in jeapordy.
2 agents measured it,
2 appraisers measured it,
the owners got 4 different
square footage totals.
Which one is right?
In every appraisal report there is one automatic adjustment; the price-per-square-foot. This number is calculated based simply of the sales price and the total GLA (gross living area - above grade living area). At the top of every comparable sale, each home is listed at this powerful price-per-square-foot total.
Also in every appraisal report, there is an calculation known as the "Square Footage Adjuster." All the comparable sales are adjusted at one time, based on a specific amount the appraiser selects. For instance, a house that sold for $150,000 may have an average adjustment of $50.00 per-square-foot. Of course, that is totally dependent of many items and each area may be different. We depend on local appraisers (and agents) to determine what that difference should be in homes that are otherwise similar. Take a look at this house that was appraised four times within two years. Each appraiser used a different square footage adjustment, and each appraiser came up with a difference value.
Appraiser "A" used $45.00 psf
Appraiser "B" used $80.00 psf
Appraiser "C" used $92.00 psf
Appraiser "D" used $70.00 psf
In this case the house was apx. 2,400 square feet, which all seemed to agree upon with a two story rectangular style home.
So, how much difference does it make?
2,400 sqft x $45.00 psf = $108,000
2,400 sqft x $80.00 psf = $192,000
2,400 sqft x $92.00 psf = $220,800
2,400 sqft x $70.00 psf = $168,000
$220,800 minus $108,000 = $112,800
Got a few extra bucks laying around?
In the next example, not only did the appraisers use different price-per-square-foot adjustments, they also all came up with different square footage totals. What are consumers to think? While these two problems are totally separate issues, the point is that when it comes to pricing real estate, there is A LOT of variation.
In our last example, the appraisers all came up with similar square footage totals, but all used different price-per-square-foot adjustments. In two years, through four appraisals, these sellers saw a square footage adjustment used of $60.00 - $75.00 - $90.00 - and the last one, $40.00 per-square-foot (which almost cost them the sale by undervaluing their home). As a real estate professional, it is sometimes hard to understand all the variations and why the "system" can't be more precise. Just imagine the confusion by most home-owners. These consumers learned a whole new level of distrust in the real estate industry, at a time when we all need to be working hard to re-establish the integrity of home prices.
For all our talk of "standardization" and "quality," the real estate industry does NOT have a mandated measurement standard, not any official adjustment recommendations for appraisers (or agents) to use. An underwriter, on any given day, may see an extremely wide range of adjustments; for things ranging from price-per-square-foot, age, condition, quality, lot sizes, amenities, etc. The home valuation process is in crisis. If we want the real estate crisis to be over, we must get back to basics in home valuation. And, it all must start with the heart of valuation; size or square footage.
The real estate industry has a crisis at hand. But, the root problem (and one issue that contributed to runaway home prices) is the unregulation of square footage. Without standardization of the number that serves as the foundation of home prices, this "crisis" will continue to escalate. It will grow until we reach a second, larger bubble. The real, real estate crisis is happening every day and causing problems for the real estate, appraisal, and especially the mortgage lending industry. Be part of the solution, earn the HMS® and share your knowledge.
2,440 sqft x $45.00 psf = $109,800
2,440 sqft x $55.00 psf = $134,200
2,440 sqft x $65.00 psf = $158,600
2,440 sqft x $70.00 psf = $170,800
2,512 sqft x $45.00 psf = $113,040
2,512 sqft x $55.00 psf = $138,160
2,512 sqft x $65.00 psf = $163,280
2,512 sqft x $70.00 psf = $175,840
2,360 sqft x $45.00 psf = $106,200
2,360 sqft x $55.00 psf = $129,800
2,360 sqft x $65.00 psf = $153,400
2,360 sqft x $70.00 psf = $165,200
2,268 sqft x $45.00 psf = $102,060
2,268 sqft x $55.00 psf = $124,740
2,268 sqft x $65.00 psf = $147,420
2,268 sqft x $70.00 psf = $158,760
16 different prices for the exact same house - which one is right?
What would the experts say?
At the heart of every residential transaction is a term real estate professionals use every day, but rarely talk about. Size or square footage provides the heart of every valuation or the "currency of real estate."