Food for Thought – Square Footage Deregulation & the Crystal Ball

Food for Thought

One gauge of the importance of square footage measurements is the national average of annual appreciation (or depreciation) rates of homes sold. Over the last two decades people have been building larger houses, so the appreciation/depreciation rates may have been slightly biased upwards, just due to the fact that there are larger houses in
the inventory mix. When the annual rate of appreciation is relatively high, people in general don’t tend to care as much about the relative precision of square footage information. When the rate of appreciation is relatively low (or in many cases even negative), people typically care much more about the relative precision of appraisals, and coincidentally the square footage of their houses.

There simply should be national standards for measuring square footage in a single-family house. Tax departments have used square footage for assessment purposes for over 200 years, yet no residential “standard” has been established and mandated. In commercial real estate, their first standard of measurement was established in 1915. Today, there are at least seven commercial measurement standards, yet the residential side of the industry continues to struggle over having more than one. There are no discussions about this topic and no education available.

With the ever growing influence of the internet and more people relocating all across the country, it is more important than ever that there be a national standard. I would also think one of the primary groups interested in this would be the companies who help arrange and finance transfers for the employees of larger companies, specifically Fortune 500 companies. Other groups that should share this interest are the appraisal industry, the insurance industry, tax assessors, as well as the primary and secondary mortgage industries. Size does matter; and the consistent, efficient, reproducible creation and communication of this information will play a significant role in the future stability of the overall real estate and mortgage markets.

There are four main factors of value. Land/Location, Condition/Age, Quality, and Size. You must have all four components or our value system doesn’t work. Almost like cooking a coconut cake and leaving out the coconut; size or square footage is a key ingredient in the real estate value recipe. Square footage provides the currency of residential real estate. If you do not know a specific (one number, not a range) square footage total, you can’t properly complete an appraisal or a competitive market analysis (CMA)

All proper comparisons and valuations require this one magic number, and size will always be one of the most important considerations in real estate. The people most qualified to provide this information are Realtors® and appraisers. In order to ensure the future stability of the real estate industry, these professionals must find a way to provide accurate property details in a standardized, nationally accepted system, without fear of liability.

While location influences every residential value, size or square footage influences the comparison of all residential property. No true or complete comparison can be made without including “size” in the calculations. The all-powerful idiom “price-per-square-foot” is a phrase and a concept used daily throughout the real estate industry. It is an American tradition, which most homeowners seem to know and trust. Just watch any HGTV® show and this simple formula is shown at the beginning of every home; not a range of size, but a specific square footage total. Every calculation of value includes the dwelling’s size. It serves as a foundation of comparison.

Two of the most powerful numbers in the real estate industry; the sales price and the size. The sales price is easy; it’s a recorded fact easily verified. The size or square footage – well, that’s another matter all-together. The only number listed within the public records system which is NOT based on a verifiable number (or even measured by any universally approved system for creating or naming the numbers) is square footage. The assessor’s office is like much of the real estate industry and relies on a hodge-podge of methods to measure a single-family home.

Every component of a single-family home is measured by some national or international measurement standard (HVAC, doors, windows, plumbing, electrical, nails, siding, shingles, etc.), that is until they are all combined into one complete dwelling. After the parts are joined to form a completed home, there is no universally accepted measurement standard.

Realtors® and appraisers are the real estate experts, and consumers deserve to know the one true size of their home. In today’s real estate market, “it depends” is a term often used when discussing measuring square footage. It is NOT a term that instills confidence in an already market weary public. Licensing in every state requires a fundamental knowledge of measuring residential square footage. The public should expect the benefit of that required knowledge from a professional Realtor®.

Many people have been trapped by square footage un-regulation and many home values are based on incorrect square footage information. Property valuation is an art, not a science. No computer program can accurately compare real estate. That “art” requires accurate (local) property details in order to produce credible results. The information (used by agents, appraisers, and AVM’s available within MLS and public record systems) is becoming less dependable all the time, leading the home valuation process towards a further decline in quality. There is a major trend towards using square footage information taken from public records; even though it is common knowledge this information is often erroneous. Those records are often inaccurate from 5% up to 50% (and higher), and in error much more than most people within the real estate community want to admit. No one wants to draw attention to or discuss this subject, at least not in public.

Many CMA’s and appraisal reports contain significant errors. Not a misprint, but a growing concern within the real estate appraisal and mortgage industries. Primary and secondary mortgage investors are just now starting to recognize this international problem. Even the insurance industry is starting to address this problem by teaching home measurement classes to brokers and agents.

Inconsistencies in square footage details are costing the insurance industries millions a year. So much so, that they are spending their own money to teach real estate professionals a skill their license requires them to possess. Values determined using the square footage totals available from public records are creating under and over estimations of value, far too often, and creating a new problem for an already delicate market. It’s a problem which is rapidly growing and starting to draw more media attention. It also may be turning into the next crisis the real estate industry has to face (the information crisis), unless the problem is addressed in the very near future. The #1 claim for many E&O policies is inaccurate square footage.

This is not a new problem. This discussion has been going on for much of the last century. So what’s changed? Why can we solve this problem now, when we haven’t been able to figure it out for over a hundred years? Actually, two recent additions to the industry have paved the way for this long overdue solution. First, the American Measurement Standard. The AMS is actually not new and is one of the two major measurement methods currently in use throughout the real estate industry, and has been in use for over a hundred years. However, it has been used without the benefit of a formal, written guideline or standard. This Standard of Practice contains more than three times the information available in any other national measurement guideline. However, prior to 2009, this methodology has been unwritten in its entirety. It’s hard to imagine why it has not been available in a formal standard of practice before now; but, whatever the reasoning, this fundamental system of practices and procedures is now available. It provides a huge step forward in the fight to standardize residential square footage, and to protect providers of square footage information for others. However, that’s only half the battle.

The second piece of the puzzle involves square footage disclosure. Colorado was the first state to provide a formal square footage disclosure form for their agents. The rule (Commission Rule E-43) applies to all real estate brokers licensed by the Colorado Real Estate Commission. It requires the listing agent to complete the mandatory form whenever a square footage total is advertised and/or provided to a seller or buyer, or the MLS. While a licensee is NOT required to measure the square footage of a property, listing brokers will be required to accurately disclose the square footage of living floor area, the source it was obtained from, and the date it was obtained whenever the broker disseminates such information.

In the real estate industry, there are forms for just about every aspect of the business. This form is a huge step forward and helps to protect listing brokers as well as consumers. Regardless of how a real estate professional measures a house, the first key to success is having the ability to produce a formal document (containing complete details of measurement rules, definitions, and procedures) and say “this is how I measured the house.” If a judge asks what method or standard you used to measure square footage, what would you say today? Many practitioners throw out the only familiar name, but when pressed for details, don’t really understand all the rules. It’s the only option they know or have ever heard, and assume everyone has been taught the same method. Not true! Approximately one-half of the country does NOT follow the rules of the ANSI measurement standard, which most people find hard to believe. However, it is easily discoverable.

There are also many parts of measurement guidelines that are left incomplete and still require any square footage totals to be partially subjective. It’s just not an exact system. It also appears to make it easier for everyone if the methodology remains vague and uncertain. How can a professional be held liable for something which has no nationally mandated standards? As long as no homeowners or attorneys push the issue, everything is fine. However, if you look at recent court cases in Texas, Arizona, and Oklahoma regarding the measurement of square footage, real estate professionals are being held responsible for the numbers they provide. The public trusts the real estate experts, and part of that trust includes providing an accurate square footage total.

In a poll of 100 homeowners, 96 said they expected their agent to provide the accurate measurements of their home and assumed it was part of the professional services of a Realtor®.

Whether milk, gas, lumber, etc., almost everything we buy is measured by a universal measurement standard. That is, all except the largest purchase of our lives; our homes. It’s time for the real estate industry to join the rest of the standardized world!