Reporting Square Footage to MLS Better Info in – Better Appraisals Out

Residential Square Footage Reference Guide

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This publication is printed with the understanding that the author/publisher is not rendering legal or other professional services. REALTOR^® is a federally registered collective membership mark which identifies a real estate professional who is a Member of the NATIONAL ASSOCIATION OF REALTORS^® and subscribes to its strict Code of Ethics. Editorial content provided by D. Hampton Thomas. Copyright 2012 David Hampton Thomas – Certified Residential Appraiser CRS/CDEI/ABR/GRI/REALTOR^®. The material contained within this text is presented for informational and educational purposes only.

Determining a home’s value typically starts with a few basic property details. One of the key ingredients in any valuation recipe is the size or square footage of the home. How do you measure a house? Length times width; sounds simple enough. This particular subject offers fewer classes and books than any other topic in the real estate industry, yet it is one of the two most important numbers in home valuation. There are numerous assumptions being made about this often controversial topic (by agents, appraisers, lenders, and consumers), which can absolutely alter home values and mortgage loans. This number can change a contract into a closed sale or outright kill the deal. It is a very powerful number that influences everyone who works in the real estate business. The purpose in this presentation is to help licensees understand the power of size/square footage in the home valuation process.

With the introduction of the new Realtors^® Property Resource (RPR), there has never been a more important time to discuss the responsibilities and liabilities of reporting residential square footage. Realtors Property Resource (RPR), NAR’s exclusive online real estate database will provide REALTORS^® with data on every parcel of property in the United States, giving brokers and agents valuable tools and features to make them better informed and to increase their efficiency in the marketplace.

In today’s litigious environment, each Agent should understand (and be able to explain) the role of square footage to prospective home buyers and sellers. When it comes to real estate and property values, there is one very simple formula, which most buyers, sellers, agents, appraisers, and just about everyone else, recognizes and understands. It is the most often utilized formula in America today to determine home values (by humans or computers). This very simple, all-powerful calculation is created using only two numbers; generally taken from closed (or settled) sales reported through the MLS, or taken from public records. Mathematically, it’s about as simple as it gets. Take the sales price and divide it by the square footage total, and presto – current home value. This simplistic formula is something that many experts believe provides the power to accurately price every home in America. However, the credibility of this formula is totally dependent on having accurate information.

Measuring square footage is an “art” and will never be an exact science. As with square footage, selecting a “comp” or comparable sale is also an “art.” It is a skill that a computer cannot learn. All real estate values require local knowledge. Any property value, which consumers should rely on to make a wise financial decision, should always be prepared by a local real estate professional. But, the advertisements make it sound so easy.

Simply take the most recent comparable sales, divide the sales price by the square footage and there’s your listing price. Consumers are accustomed to hearing the words “comp check” and “CMA.” They often sound so easy most consumers assume anyone can do it. After all, the internet has every imaginable piece of property data; just plug in a few addresses, and instant real estate expert, right?

It’s never quite as simple as “price-per-square-foot.” However, that’s the way most consumers, and much of the real estate, appraisal, and mortgage lending industries view home values. Even with all the technology at our disposal, the heart of real estate comparison and valuation comes down to one very important number, the number where it all begins – square footage. If this first number in the valuation process is not measured or applied accurately, then every calculation made using that number has a very good chance of providing inaccurate property values. There are many times when an agent may have three totally different square footage totals for the same property (one from an old MLS listing, one from public records, and one from an old appraisal). Whatever square footage total is selected to insert into the magic price-per-square-foot formula (all of which are deemed reliable sources), can dramatically change the value. Any discrepancy may not be discovered until the end of the transaction, after plans have been made and money spent. That is NOT the time to discover the square footage total is wrong!

The only way our real estate valuation system works is with accurate property details.

Most real estate professionals use size or square footage to compare properties. While certainly not the only consideration, it does provide a logical starting point to compare similar properties. We see it in “closed” sales information every day, but very few ever question its accuracy. Regardless of the source, once a square footage total has been recorded in MLS it instantaneously turns to fact. This number provides one of the most important components of the real estate comparison and valuation processes, yet its creation is rarely a topic of discussion. The “Art” of measuring a single-family home is typically covered by only a few pages in most real estate and appraisal textbooks. This powerful number influences property values across the country, yet real estate professionals have little training on the creation or importance of this subject.

Home buyers are looking for more (and better) information when they shop for houses. More information in fewer sources, or one-stop shopping so to speak; for everything associated with the home buying process. Many states are passing new laws which require more real estate disclosures. Although there is still no national law that requires the disclosure of the exact finished floor area of a house, it’s just a matter of time before market-wise buyers and sellers (and attorneys) discover the power of size in the home valuation process.

Other than “location,” the single most-important consideration in residential valuation is the size or “square footage” of the home. Not only is it an indicator of if a particular home will meet a homebuyer’s particular needs, but it also affords a convenient (although not always precise) method to estimate the value of a home and to compare it with other similar properties. Although real estate agents are not required to report the square footage of homes offered for sale, when they do report a square footage number, it is imperative that any information they give prospective buyers is accurate.

Determining a home’s square footage should be the first step in every property valuation. Every CMA (or appraisal) must have a specific square footage total to properly begin the comparison process. The two numbers that influence all residential valuations are the sales price and the square footage. We all know the “sales price” is recorded in public records; it is a verifiable fact. However, the way we view the other number that provides half of this all-powerful calculation, has dramatically changed; especially since the mid-nineties and the start of the internet revolution. The entire MLS system was founded and its reputation built by Realtors^® providing property details; accurate property details. Information created specifically so that real estate professionals could form opinions on property values based on information provided by other real estate experts.

The MLS database was created so that professionals would not have to rely on local tax records. Creating a CMA based on inaccurate square footage details is costing buyers and sellers thousands upon thousands. It’s also adding to the current problem of low appraisals.

This problem could be avoided by having each home measured PRIOR to completing any competitive market analysis (CMA). This problem is so large, that a few of the nation’s largest insurance companies have started offering classes in measuring square footage to local real estate agents. Inaccurate square footage data is costing the insurance industry millions each year. So much so, that they are spending their money to teach real estate professionals something their license requires them to know. Industries outside of the real estate business can see this problem and know it is mounting, but there are just no easy answers.

Sometime during the discussions about responsibility verses liability, many agents have turned away from measuring and reporting square footage information, mostly due to liability concerns. The use of square footage information provided by local tax departments has exploded and continues to infiltrate multiple listing services at an alarming pace. The tax department has no responsibility or liability in reporting any square footage information. They are also frequently unaware the real estate industry has become so dependent on the property details they provide.

The real estate industry never held a meeting with public records officials and asked them about using the square footage details listed in local tax records. No one ever really thought about what would happen if tax records became the key source of square footage data for the real estate industry. County officials will quickly tell you the square footage numbers listed by the tax department are estimates only. Using the square footage total from the local tax office was never designed or intended to be a part of the real estate information process. Providing an accurate square footage total with every listing was part of the listing “service” and the very foundation of the entire home valuation system. But, somewhere along the way agents stopped providing this one very important number, which is also a number that separates Realtors^® from every other online real estate service.

The use of square footage details taken from public records in the MLS has skyrocketed into a national crisis; an information crisis. There are no national requirements for assessors to measure square footage, or to categorize finished space or otherwise. Knowing what is included within the totals listed in public records can often be misleading. Most agents and appraisers use the largest number listed in tax records as finished square footage and that number often includes basements, finished areas (which would not be counted as GLA), unfinished bonus rooms, full unfinished attics, etc. And, the margins of error are alarming in most public records; 500-1,500 square footage errors are much more common than you might imagine.

These are all terms used to express “total square footage” in different counties across the country.

So, how do we reverse this current trend and information crisis? Every listing Agent must accept responsibility for this one very important component of every home they offer for sale. The listing Agent must personally create, or have created by someone else, an accurate square footage count (per level) for each home reported through MLS. Each broker must accept the responsibility for collecting this information, which is vital to their peers. Whether they choose to personally measure the home, have someone in their office measure it, have a local appraiser measure, or hire one of the many new specialty companies springing up all across the country that provide floor plans and a square footage breakdown for listing agents. A few years ago, video tours were the new niche and everybody was fast to join the video revolution in real estate. Next, the use of floor plan services may become the new niche market among listing agents.

Heated Area (S/F), Area,GFLA, SF of ground area (SFGA), (SF) Fin .

If everyone uses this type of service, it will quickly become a natural part of the process. These companies help the listing company in several ways. First, they provide detailed floor plans that help you truly represent the “property” to potential buyers. Having a floor plan and a video tour online will also save brokers time. Buyers can shop at home and view the information that is most important to them (location, size, layout, etc.). By the time a potential buyer calls to see the property, they are familiar with everything about the home, eliminating some of the show and tell services which often occupy an agent’s valuable time. The entire “show and tell” process can be an online experience. But, it needs this one last element to make it work. These home measurement companies are spreading like wildfire (need to be regulated) and many agents have seen the difference in MLS where these services are common in the market. Creating a CMA is much easier and much more credible when you know the details of each home to be used in a property comparison. You have a floor plan to compare any functional problems with the design, can compare above grade and below grade to similar spaces, and there is a vast overall improvement in the comparison and valuation of homes in the local market. Another benefit of improving the square footage details in MLS, is that the percentage of low appraisals drops dramatically. Appraisers (and agents) have access to accurate property details and can simply do a better job at valuing real estate, due to having reliable and consistent information.
Another benefit of using a home measurement service is that the liability issue is greatly reduced. While the listing Agent will always be responsible for the accuracy of the information they provide, standing in front of a judge with a number created by a professional measurement service provides a much greater degree of protection than standing in the courtroom with a number you copied from the local assessor’s office. Errors in the square footage details contained within public records is common knowledge, and is information which should be known by a reasonably prudent, licensed real estate professional. Using professional measurement services to provide floor plans, and a specific square footage total, is a win-win situation for consumers and the real estate industry. It allows agents to provide their clients with a higher level of accuracy in valuation and allows them to better represent the property to potential buyers. It helps to protect home buyers and sellers from making any financial decision based on erroneous square footage data. It helps to protect both Agents involved in the transaction. And, it allows the burden of liability to be directed towards a professional measurement company that is trained and insured for this one area of the home-buying process. This service changes the liability discussion and allows the MLS and Realtors^® to provide this vital information without the fear of liability. This one change could alter the future of the real estate industry.

Recent court cases have shown that using the information listed in public records does NOT guarantee a liability free transaction. These cases are setting a national precedent and the legal profession has watched closely as these cases have made their way through the appeals process. Agents are being held responsible for the square footage totals they provide, regardless of their source of information, or any disclosures they made about that source. We must recognize that this part of the business will always provide a degree of risk, just like many areas of the real estate home buying and selling processes. Part of a real estate professional’s job is solving problems and square footage is a problem the real estate industry must solve. Utilizing professional measurement services offers the real estate industry a new option in the battle to remain “the most trusted source of real estate information in the world;” not the local tax department.

REALTORS^® Code of Ethics:

If a REALTOR^® represents you, whether you are buying or selling a home, you can count on that REALTOR^® to:

• Put your interests ahead of his or her own, at all times. A REALTOR^® makes every effort to understand the housing needs of his or her client, thoroughly researches available inventory, and shares all relevant information with the buyer so that he or she can make an informed decision.
• Disclose all pertinent facts regarding the property and the transaction to both buyer and seller. If a REALTOR^® believes information provided by a seller is questionable, the REALTOR^® is obligated to investigate. REALTORS^® should recommend that buyers consult their own experts, such as home inspectors, to address concerns.

1.Does an “informed decision” require accurate square footage information?

2.Does a “pertinent fact” and the duty to investigate questionable information mean that all square footage details should be verified? If public records are known to frequently provide inaccurate square footage data, should a reasonably prudent Agent, using “due diligence,” require them to investigate?

Automated Valuation Services and the Home Valuation Process

Pull five different automated valuation models and you will discover they all have the exact same square footage total, and most often a specific price-per-square-foot calculation.

With AVM’s relying on square footage details in public records and the new RPR relying on the information of the real estate professionals, the new “Gold Standard” of valuation services could have a huge advantage over the competition. As long as these computer programs rely on this information, their values will never provide consistently accurate valuations. And, for Realtors to remain in control of the real estate industry, we must recognize the importance of this one number in the home valuation process. It is a number which can and should only be available to Realtor^® members; and a number which separates the National Association of Realtors^® from any and all online real estate information services.

“You get a professional MLS listing in your local MLS with all the essentials that 6% agents provide, PLUS your listing will appear on literally hundreds of other websites that display MLS listings, including national sites such as realtor.com, msn.com, remax.com, kw.com, prudential.com, realestate.com, and more.” Great ad; if everyone utilizes the same property information, the gap between the NAR and the competition narrows, substantially.

Home owners are relying on automated valuation services at ever-increasing rates. Agents often have to explain why these computerized values are not accurate to their buyers and sellers. Big banking is also strongly promoting the use of automated valuation products in the mortgage lending process.

However, all AVM’s have one common denominator; the square footage details listed by the local tax department. They also typically provide a price-per-square-foot calculation in their valuation formulas. If the RPR is the information of the real estate professionals, and contains accurate property details, its level of consistency and accuracy will be far ahead of the closest competition. The fact remains that when discussing real estate, the words “square” and “footage” go together like “cake and ice-cream.” When people think of real estate, they think of size or square footage. It is a phrase and a concept embedded in our thought process that gets passed from one generation to the next. Ask ten people about real estate values and the concept of price per square foot is one of their first thoughts. It is as American as baseball, hot dogs, and apple pie. “Price per square foot” is a term recognized by the majority of home buyers and sellers. Even first time buyers have heard the phrase and know how to use it. And, as long as America relies on the price-per-square-foot formula, the size of each home will impact its value.

• Appraisers & Square Footage

Many real estate agents believe that appraisers have their own measurement standard, which all appraisers are required to follow; they don’t. In most states appraisers are not required to follow any specific measurement method, other than what is considered “locally acceptable.” Appraisers typically get to decide for themselves exactly what that means.

Fannie Mae says “To ensure consistency in the sales comparison analysis, appraisers must compare above grade areas to above grade areas, and below grade areas to below grade areas. Appraisers may deviate from this approach if the style of the subject property or any of the comparables does not lend itself to such comparisons.” Like much of the real estate industry “it depends” applies in the creation of residential square footage.

USPAP (Uniform Standards of Professional Appraisal Practice) provides a minimum set of quality control standards, but it DOES NOT define or prescribe any specific methods for appraisers to use. Appraiser trainees are taught the art of measuring square footage by a supervising appraiser, who bases the lessons on a certain set of localized Guidelines. But, guidelines are just that: guidelines. They are not requirements, stop signs, speed limit signs, etc. Appraisers have the same options that Agents have in regard to square footage and measurement methods. Even experienced real estate instructors often teach continuing education classes, making reference to the different measurement standards that appraisers are required to follow. If the instructors don’t know the facts about appraisers and calculating square footage, students cannot accurately inform consumers about any discrepancies between measurement methods. Assumptions are the rule, not the exception when it comes to residential square footage.

There’s been very little discussion about square footage methodology among governmental agencies, lending institutions, or in the secondary mortgage markets; they see square footage as the responsibility of the real estate industry. Without some basic standardization, national guidelines, or a universally recognized “language” among all real estate professionals, all property comparisons are at risk of providing inaccurate home values. The quality of the value conclusions provided by the appraisal industry are often in direct correlation with the level of quality information provided through the local MLS.

The single most widely used appraisal form is the Fannie Mae Form 1004 and Freddie Mac Form 70, March 2005 (one form which carries both numbers and is for use with single-family dwellings only). On this form, at the top of the page under the Sales Comparison Approach, every comparable sale is automatically calculated at the “price per square foot.” This specific calculation does NOT take into account the land value, age, quality, condition, style, bed and bath count, any basement square footage (finished or otherwise), garages, fireplaces, porches, decks, patios, or any other amenities. This federally mandated appraisal form automatically takes the sales price and divides that number by the total “gross living area;” only the above grade finished living area. This one line, the price per square foot, is considered by many underwriters to be a strong indication of value.

As long as the subject property is within the price-per-square-foot range of the comparable sales (based solely on this simple calculation), the property is most often approved. There’s no doubt, the real estate information system could work better if everyone created and reported square footage details by the same method. There should be one “language” of real estate. Many Agents have never been taught the term “GLA,” which appraisers use on every appraisal assignment. According to the calculation on the appraisal form, if a home has a 1,600 square-foot finished basement, the finished basement receives no weight or consideration in this specific calculation. If one house sells for $400,000 and has a 2,000 square-foot first level (plus a 2,000 square foot finished basement), the sales price per square-foot (according to this form) is $200.00. If the next house has a total of 2,000 square feet (all on one level) and it sells for $400,000, what do you think about the price per square foot? You guessed it – $200.00 per square foot.

Seems like something is missing, but it is nothing more than a simple calculation which only considers the sales price and the size. For many lenders and underwriters, this one calculation may play a larger role in their decision-making process than it was originally intended to provide. Regardless of all the analysis, calculations, and comments provided by an appraiser, if the subject property has a price-per-square-foot total that falls outside this range of the comparables, the loan has a very good chance of being rejected.

Whatever your opinion on providing square footage data, we must all acknowledge that “size” influences the comparison and valuation of all residential properties.

Real estate is a business unlike any other. Each individual success is based (in part) on the contributions of their peers. A membership in the local association or board of Realtors^® is highly individualized, yet cannot operate without the cooperation and communication of its fellow members. Realtors^®, appraisers, and many others utilize the information provided through the MLS database. The next real estate generation will be more technologically savvy and more focused on traditional services than any other before it. We’re all starting to hear words like transaction broker or facilitator more often and in many new areas. Whatever names are used by practitioners in the future, real estate professionals will always need to be responsible for helping to determine property values. Preparing accurate CMA’s requires an understanding of how important square footage is to the language of real estate. By working smarter now, we ensure our place in the new real estate market, and proclaim to all other industries that we remain: THE real estate experts.

There are measurement standards for each component of a house (i.e. windows, doors, flooring, shingles, nails, plumbing, electrical, HVAC, framing, etc…). But, once all the parts are combined to form a home, there are no mandated measurement rules. It’s obvious that no single measurement standard will work perfectly in every market. There will always be a degree of “art” required in measuring residential square footage, and we must agree that there will always be exceptions to the “rule.” However, we must first establish “rules” to have exceptions. Even with the unique landscapes of locations like Seattle or Vancouver, and the wide assortment of one-of-a-kind properties scattered across the country, approximately 92% (+-) of all homes still fall into the “typical” or “average” category. These homes can (and should) be calculated by one standardized measurement method. In this day and time (the information age), it is hard to imagine any profession without nationally mandated measurement standards and a universal language of communication, especially for their main commodity, which in the real estate industry is information.

Regardless of how agents handle CMA’s in any given market, every appraiser is required by federal law to compare properties by square footage. In the middle of every appraisal form is an adjustment for square footage. It’s not an optional area of comparison. Most appraisal software provides an automatic price-per-square-foot adjustment, which is defined by the appraiser.

For obtaining a specific square footage total (a total GLA) appraisers are required to use the best available information. Regardless of where they get this information, it must include a heated and cooled square footage number; one specific (above grade) number or GLA.

• Television and Square Footage

Home transformations, designer tips, flips, staging, home improvement, landscaping, first time buyers, what’s my home worth, etc… Television executives have discovered real estate shows are drawing viewers, in the millions. People want to know more about this subject, which has been at the top of the news for the last year. They want to know about their investment, what they can do to improve it the most, how the business works, how’s the market (local and national), and what new rules are in place to keep the housing bubble from bursting again. Details – people want to know more about real estate. The more they learn, the more important “size” is going to become.

The public deserves, and will eventually demand, to know the precise size of their home. If the real estate industry is going to assign a specific dollar amount to every square foot, then every buyer and seller should want to know “the size” of their home, not an estimate or a number taken from public records. A poll of 100 sellers showed that when they hired a real estate professional, they expected the listing Agent to provide this service.

HGTV^® is a perfect example of the way America perceives real estate values. Watch just a few real estate shows and you will quickly find the most often used valuation method in the country. One of the first bits of information that hits the TV screen is the dwelling’s square footage. Not a size range, but a specific number. Many HGTV^® (and other) television programs specifically compare properties based on two simple items: sales price and size. They discuss each home’s features and then talk about the average sales price (per square foot) in that particular neighborhood. In shows like “Property Virgins^®” the agent may tell the buyers that the house they are looking at is listed at $90.00 per square foot, but that other things in this neighborhood have sold at $98.00 PSF (no mention yet about the touch of updating that was needed). In “House Hunters,” the first two details are the exact square footage and the price per square foot. Size matters to them, so it matters to their audience. They are teaching the next generation how this basic formula determines property values.

When you quote a square footage number, people automatically have an idea about the size of the dwelling. Everyone knows what you are talking about and the term “square footage” provides an easy to understand item of comparison. Every homeowner also seems to know the size of their home; just ask your neighbors. Ask ten people, and nine (if not ten) will know the approximate size of their home. Size influences the perception of value; it’s the American way. There are several HGTV shows (and many other real estate shows) that advertise specific square footage numbers and specifically discuss the price-per-square-foot of each property. People recognize, visualize, and understand the concept of price-per-square-foot. It is a longstanding tradition and is discussed among homeowners, agents, appraisers, insurance adjustors, assessors, builders, bankers, and anyone who has any interest in real estate.