Why Do Square Footage Disputes Arise?


Why Do Square Footage Disputes Arise?

Source:  Why Do Square Footage Disputes Arise? | Realtor Magazine

 

House plans with ruler and pencil

Why Do Square Footage Disputes Arise?

Be ready to explain to home buyers and sellers why there may be conflicting reports on a home’s livable space.

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Many characteristics affect the appeal, marketability, and value of a property. One of the most important is the size of the dwelling. Disputes rarely arise about the age of a home or the number of bedrooms, baths, or garage spaces. Disagreements about square footage, and the manner by which the dwelling size is calculated, are more common. Unfortunately, if the methods applied are not accurate and explained, they may result in misleading opinions and conclusions. Because dwelling size matters to everyone in the transaction—buyers, sellers, agents, appraisers, and lenders—it makes sense to encourage the understanding and use of industry-accepted terms to define size.

Appraisers use three approaches to develop an opinion of the value of a home:

  1. The sales comparison approach looks at the subject property against similar, nearby recently sold properties.
  2. The cost approach considers the value of the site and the estimated cost to replace the subject dwelling, less depreciation.
  3. The income approach, generally applied to multiunit dwellings, is applied where rental income is a factor in the decision-making process of buyers and sellers.

All are contained within the Uniform Residential Appraisal Report, the residential appraisal reporting standard promulgated by Fannie Mae and Freddie Mac. The report form uses the term “gross living area” rather than “square footage” to identify the size of a dwelling and as a unit of comparison in the sales comparison approach.

The agencies involved in residential lending—Fannie Mae, Freddie Mac, the Department of Veterans Affairs, and the Federal Housing Administration—have slightly varying definitions of gross living area, but all agree on these facts:

  • Gross living area is the finished, above-grade residential area.
  • Gross living area does not include unfinished spaces (e.g., exposed floor joists, wall studs, and roof rafters) or unlivable areas (e.g., stairwells, stair landings), either above or below grade. Therefore, any area, either partially or fully below grade—like a walk-out basement—is not recognized as gross living area.
  • Areas like garages, porches, patios, and finished areas not accessible from the interior of the primary dwelling, including accessory dwelling units, are also excluded from the gross living area.

The agencies’ standards recognize situations when finished attics, garage conversions, and additions may be included in the gross living area, specifically when such improvements are accessible from the interior of the primary dwelling and have a permanent, sufficient heat source, as well as similar design and quality of construction. to the primary dwelling. Note: Floor plan functionality may affect marketability and value. For finished attics, the same criteria are considered, with attention to access and the determination of livable ceiling height area. For example, the FHA requires rooms and bathrooms to have a minimum ceiling height of 7 feet for 50% of the room’s floor area. The remaining area must have a minimum height of 5 feet.

The cost and quality of finish aren’t determinants of what’s included in gross living area. From an appraiser’s perspective, however, areas excluded from the calculation may still contribute substantially to the appeal, marketability, and value of the property. Examples include finished and unfinished basements and below-grade rooms.

Disputes over square footage can result because the standards for state and county public records do not necessarily coincide with the agencies’ standards for the URAR. Except in new construction, where plans are provided, the scope of work for URAR assignments requires appraisers to measure the property. Appraisers use exterior dimensions of each floor in the structure to calculate the gross living area for detached and attached one-unit housing. For condominium housing in multiunit buildings, interior perimeter dimensions are used. Where differences in data sources exist, appraisers must explain the difference in their report.

In addition to the standards published by the agencies, there’s a national voluntary standard for calculating square footage, ANSI Z765-2021. Even though it’s a voluntary standard, several states require appraisers to comply with the ANSI standard.

Although all the above appears to be absolute, the agencies realize exceptions to their standards exist. In some markets, for example, finished below-grade areas are included in the gross living area because it is common or predominant in that market due to terrain or climate. In such instances, when developing a sales comparison analysis, appraisers must treat all data collected in a consistent manner and clearly explain the reason for all deviations.

As noted earlier, space contributes to the appeal and marketability of a home. Be sure to be informed when talking to buyers and sellers about the spaces within a home. If you’re talking about square footage, recognize that the gross living area calculation used by an appraiser may not match public records, but it enables appraisers to develop a credible comparison in the sales comparison approach and a credible cost approach that will lead to a supported opinion of market value of the subject property.

Dawn M. Molitor-Gennrich

Dawn M. Molitor-Gennrich, SRA, AI-RRS (dawn@dmgconsultant.com), is president of Molitor-Gennrich Consulting Inc., Walnut Creek, Calif., and a former member of the Appraisal Standards Board of The Appraisal Foundation.

Francois K. Gregoire

Francois K. Gregoire, AHWD, RAA (francois@tampabay.rr.com), is president of Gregoire & Gregoire Inc., St Petersburg, Fla., and 2021 vice chair of the National Association of REALTORS®’ Real Property Valuation Committee.

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