Institute of Housing Technologies
Improving the Real Estate Information Network
Real estate is and always will be a people business. Money is a powerful motivator
and one person’s idea of ethics may not always agree with the next. Such can be the
case with MLS reporting; sometimes. It’s up to each of member of the MLS to help
monitor such activity and maintain the credibility of this exclusive property
When you become involved in new construction and creating new developments, you quickly learn how appraisals work and the importance of the simple phrase, price-per-square-foot. You have to know what other homes in the area sold for and how the next house will “comp” out. Builders understand a house has to be sold twice; once to the buyer and then again to the lender/appraiser/underwriter. Anyone who has been in the business for long understands how this process works. Unfortunately, some builders learn how to help size work to their advantage.
One new construction dwelling was listed in MLS with 2,148 square feet. Working on the appraisal, I calculated the house at 2,512 square feet. After two more trips to confirm the numbers and then two other verifications by others, the same results. This was good news for the buyer and they were getting much more house for their money. I assumed it was just a mistake and informed the builder. I never thought much more about it until it showed up in MLS as a “closed” sale. The sale was reported “closed” with 2,148 square feet. The builder was well aware of the correct square footage, and I brought it to his attention again after the house was reported sold. The MLS was never changed. Now, every time this dwelling shows up for use as a comparable sale (with a sales price of $324,900 and 2,148 sqft) it calculates to $151.26 per sqft. If the square footage was reported correctly it would show $324,900, 2,512 square feet, and would calculate to $129.34 per square foot.
In this case, “size” was used to help other dwellings appraise at a higher price. The price went up on the next few spec houses and the builder pointed to this comparable sale at over $150.00 per-square-foot. It’s hard to argue with the “proof” of value as reported in MLS. The MLS records carry a great deal of power. Whether reported mistakenly or otherwise, a closed sale affects the value of many sales that follow. Information is power (and money), and is often controlled by the agents and/or builders that report square footage details to the MLS. As professional agents and appraisers, we must watch for and report such activity!
CMA’s and appraisals are only as accurate as the information they use to calculate values.
A photo of a finished dwelling is extremely important for many reasons, but this is one area where many systems do not require such photos. They may be suggested, but are not mandatory. Instead, an artist’s rendering, floor plan, a picture of the same house built in another location, or a host of other possible options are allowed. The only way to ensure accuracy is to have a photo of the final product. Not an almost finished house without a driveway and landscaping or some other final touches remaining, but the final result with everything appearing as it does when the buyers are given the keys. As a listing agent, you generally have to go back to the house to do a walkthrough, take off a lockbox, or pick up a sign the day of closing; therefore, it shouldn’t require a special trip. That photo, taken the day of closing, can make a huge difference in the comparison process and is another one of those things a professional agent should think important.
“Plans,” we all make them; do yours ever change? So do the builders; a wall here, closet there, or they may decide to add a bonus room well after construction begins. Whether the builder intentionally makes a change, the buyer decides to move a closet or a wall, a carpenter reads one number wrong that slightly changes all the numbers that follow, or a hundred other possible scenarios that can change the final size of the dwelling. It happens every day. Building plans are generally just what they say, plans. Often, the finished product does not equal what the plan called for with regard to square footage.
They are generally close and should be within a reasonable approximation, but plans are subject to interpretation, change (intentional or otherwise), and a host of other factors that may alter the final product.
While using the square footage from a set of builder’s plans is acceptable in listing new construction, it is always a good idea to check the finished product against the original set of plans.
Whenever an agent reports a finished square footage taken from builder’s and/or designer’s plan, it should be disclosed that the finished square footage calculations are based on plan dimensions only and may differ from the completed finished square footage. Example: “GLA taken directly from builder’s plan and subject to verification.” That statement, or something similar, helps protect you and your client and is just a smart business practice. Square footage taken from plans is typical in most markets. As a listing agent, the next time you list new construction dwelling, go out to the home after the house is finished and pull the tape measure. I think you may frequently find there is a difference. Agents should make a habit of measuring every listing.
Just to give you one example: a local agent took my advice and measured the finished product on a very expensive (in our market) “spec” dwelling in a private, gated community. She came up with 143 square feet more than the plan called for and called me very excited.
I eagerly went to the new house to see if we came up with the same total; I got 142. Close enough for me. She actually changed the list price of the house by $22,000. It sold for $20,000 more than originally listed. Think she had a good day? Now, that same builder is telling all his friends the story and the agent is getting more listings than ever before. Something that took thirty minutes made her look more professional; made her seller more money; made her more money; and that one extra effort turned out to be a very good career move. Might be worth a try, right?
Another example of new construction and a square footage issue is from an appraisal I did recently for another appraiser. The house was built according to the plans with the builder and buyer watching every detail. I did the original appraisal, prior to construction, with the value made subject to completion. Using the square footage total from the plans, I valued the house based on 3,474 square feet. But, this time (with a finished dwelling on site) I measured the house and came up with 3,571 square feet. It is only a 97 square feet difference and, at least percentage-wise, not that much of a difference. Certainly less than three percent is not enough to talk about; it depends! The house appraised at slightly over $162.00 per square foot.
So, in this case, approximately $15,700 (+-) was added to the value. Determining a home’s value is never quite that black and white and many other factors affect value. However, let’s just say for argument’s sake the house is worth $10,000 more because I measured it, rather than relying on the plans. In my book, $10,000. would make it worth my time, every time. Try it for yourself.
The proper reporting of listing details is one of the most important things an Agent can do for their association and fellow members. Each “member” of the MLS system has to depend on their counterparts to provide dependable information. Based on this information that is reported to MLS, other agents (or appraisers) are going to make a value decision for their client. Details make a very big difference. The MLS is truly one of the most unique memberships in the world.
MLS data is trusted as the most reliable source of information throughout the real estate profession. Whatever is published in this (private) databank is considered as “fact.” Someone may come in from out of town to do an appraisal; an agent may be new to your area; one agent may normally work with equestrian properties but has a friend who needs help with their home purchase in a community across town; or a host of other possible reasons why someone may not be familiar with that specific property. What they know about each property is only what they find in the MLS. They did not come to the open house and see the custom kitchen cabinetry, the imported hardwood flooring, his and her closets with $10,000 worth of shelving in each. Or, perhaps the opposite scenario; holes in the vinyl flooring in the bathroom, the sloped flooring in the laundry room, the outdated electrical panel, etc. There are countless possibilities but MLS is the main source of information. If you report a property to MLS, try to describe the house to someone who will never see it, but wants to know every detail so they make a wise and informed decision about buying that house.
MLS information provides the power source for real estate valuations. Accuracy and details are the keys to success.
Buyer’s Beware - Builder’s Square Footage