Two measurements standards keeping an industry apart
The real estate industry has one monumental flaw; it cannot agree on how to measure a single-family house. As long as there is a disagreement about how to measure residential square footage, there is going to be a problem with creating accurate and consistent home valuations. CMA’s and appraisals are completed every day with significant errors; mistakes large enough to alter property values. This problem was a major contributor to our current real state “crisis” and must be corrected before consumers and mortgage investors are protected from risk.
Why do we have this problem? There have always been two basic philosophies or measurement standards for calculating residential square footage. There are also hundreds of local variations. The method that you use depends on who taught you how to measure and where you live. Even with a wide variety of localized measurement methods, the majority seems to fit into one of the two main theories or methodologies (ANSI or AMS).
The culprit, that keeps the real estate industry from offering one nationally mandated measurement standard, typically measures between 30 and 50 square feet; hardly enough to keep an entire industry in confusion and debate. However, that’s exactly what we have today in the real estate and appraisal industries. A simple disagreement over whether to counts stairs as square footage only on one level {where all finished living area is floored, functional, finished, and offers equal utility} or on all levels [counting the sloped space beneath the staircase the same as all other finished living area], is an issue creating confusion, misconceptions between agents and appraisers, heated discussions, and way too much conversation over an issue that the real estate experts should have resolved decades ago. Most professionals are not as concerned with which measurement “standard” they follow, only that all real estate professionals are required to follow the same one.
The MLS database (provided exclusively by Realtor® members) does NOT have any nationally mandated measurement standard, or any national requirement for calculating or even naming square footage information. In fact, listing Agents are not required to report any square footage information. So, we have listing Agents, who may or may not report a square footage total; and if they do decide to provide one, they don’t have any national requirements (or educational resources) for creating the information. The National Association of Realtors®, the Appraisal Institute, or the Appraisal Foundation does not offer their members books or courses on one of the most influential subjects in the industry. The square footage information reported through MLS systems across the country provides the main data-source for the entire real estate appraisal industry; leaving two industries sharing data, which is created and reported without any national coordination, guidelines, or resources to turn to for help in answering the most basics home measurement questions.
How can agents or appraisers truly provide accurate and consistent square footage details when their industry does not provide any detailed educational resources to teach this fundamental real estate skill? Measuring square footage is much like the home valuation process itself and often requires equal amounts of “art” and science.
Does square footage affect appraised values? Absolutely! The appraisal industry is only as good as the information they use to determine a home’s value.
This scenario is very similar to the MLS system itself. There are 883 MLS services all across the US. In several states there are dozens of independently operated systems. They all basically do the same thing. But, they may use different software programs, have different information reporting fields, and their design and data input guidelines are controlled by the local membership. Whenever there is talk of statewide MLS systems, it brings up local power issues; control over local dues and MLS fees, and many leadership issues. Most local associations or boards do not want to give up their power and turn all the decisions over to anyone who is not familiar with the nuances of their local market. Regardless of the new system, it contains a degree of the unknown; and also requires a change that can never be reversed once the power has shifted. There is a great deal of influence and economics involved and any such transformation requires a new political infrastructure.
There was no master plan to spread MLS across the country, it just kind of happened that way. The first meetings of the MLS were held in a local VFW where note cards were exchanged. We’ve come a long way. However, all this growth happened without any “data standard” and with no overall vision for the future. With all the talk of consumer protection and strict Realtor® ethics, the public has very little protection when it comes to creating and using one of the most important numbers in real estate; square footage. This topic is conveniently overlooked in any discussions of new data standards. It’s hard to imagine any new and improved data standard, which does not include square footage; one of the most influential numbers in the home valuation and comparison processes.
Any listing price an Agent may suggest is often based on a price-per-square-foot formula, with the square footage total taken directly from the local tax office. Look at any videos or books on creating CMA’s and you’ll quickly find the price-per-square-foot formula. But, what you won’t find is any mention of making sure the square footage total is accurate prior to calculating the home’s value. Most brokers (and appraisers) look first to the MLS. If they don’t find a specific square footage total they move on to the next source; public records. The original MLS was developed as the information of the real estate professionals, to be shared with other professionals. Real estate was a “full service” industry, which included measuring the home and listing the square footage details so that other real estate professionals could share the information, and accurately compare and value properties.
Somewhere along the way, that “full service” mentality (accompanied by the fear of liability) took the square footage details out of the information equation; although the average price-per-square-foot formula was not. Home prices are determined based on a price-per-square-foot formula, yet the way to calculate a “square foot” is often left to chance. All of which leaves consumers at great risk. So, we have real estate professionals sharing information that was NOT created by the same methods. No-one seems to really understand this topic (and the power) of square footage, yet the price-per-square-foot formula is alive and well in the real estate industry today. And then we wonder why we’ve had problems with real estate values? It’s unavoidable under the current real estate information system.
These problems are NOT getting any better, as more and more people turn towards computerized home valuations. The real estate industry obviously thinks the “square footage fairy” works over at the local tax department, and is providing all this great (free) real estate information, just for the benefit of all the real estate experts and computerized valuation programs. Take free info from the local tax office, put it in a pretty wrapper, and then sell it for a profit; what a great business plan [AVM]. The local tax records were never designed or intended to be part of the MLS, or to be used to help determine detailed property values. There’s no single reason this has happened, it just worked out that way. When the internet allowed the flow of free information and the talk of liability was raging throughout the real estate industry; along comes the fast free square footage totals listed in tax records. The next thing you know, the MLS is filled with the exact square footage totals listed in public records. And, many agents are falsely led to believe they are not responsible for the accuracy of the square footage information (as long as they disclose their source).
Fear of liability has overtaken professional responsibility, and consumers are left with home values based on inaccurate square footage details; leading to inaccurate home values, leading to appraisal and loan problems. Now we find ourselves with a total information calamity, all because Realtors® stopped providing one of the main services that put them in their position of power in the first place. If real estate brokers and the MLS are just using the information listed in public records, what’s to keep Yahoo® or Google® from providing the same services? What separates Realtors® from all the other real estate websites is information (quality information), which must include the accurate square footage total of every home reported through MLS. It is one of the most powerful numbers in real estate and Realtors® must take back the responsibility for providing this vital information. Any housing renewal or growth depends on consumer trust. We need to remember that NO Agent ever has to measure any house. But, if you take the listing, you should take the responsibility for providing accurate data; arguably, duties owed to your clients and your peers.
Each real estate professional has a choice. Listing agents can choose to create the square footage information themselves; have another broker in their office or community provide the information; have a local appraiser measure the property; or hire one of the new floor plan and home measurement companies that are spreading across the country. Having the square footage information provided by another professional, ensures the accuracy of the data (which helps to price it right from the start); and it greatly reduces the agent’s liability. Floor plans provide buyers a better online shopping experience, allows the seller’s property to stand out among the competition, allows other agents to create better CMA’s, and allows appraisers to do a better job appraising. Having square footage details provided within each MLS listing can improve the quality of appraisals and allow more buyers to get the loans they deserve. These services offer a great opportunity in the real estate industry, and I hope will be a part of the future of MLS.
However, for those professionals that choose to learn this craft and the art of measuring residential square footage, these new books and online courses are the first in-depth manuals of their kind, and a much needed resource for creating and communicating residential square footage. If you are serious about learning how to professionally measure a single-family home, these products offer you the materials you need to create accurate and consistent measurements. Every real estate and appraisal office should have a copy. The most complete and comprehensive resources available in the industry today.
In order to improve the real estate information system, there must be one nationally mandated measurement standard, which is taught to every real estate practitioner. The use of two standards (and a wide array of localized methods) creates unnecessary confusion and keeps consumers held hostage in a dangerous home valuation game. The real estate industry must join the rest of the standardized world. Realtors® must provide accurate square footage information for every listing. And, they must be offered the tools to create and provide this information without fear of liability. In this case, the responsibility must work from the top of the industry down. As long as the MLS provides the backbone of the American home valuation process, the information used by real estate professionals to calculate property values must be consistently and accurately created and reported. Consumers deserve no less.
