Institute of Housing Technologies
Improving the Real Estate Information Network
Does your local Multiple Listing Service and local Realtors® knowingly use fraudulent data to determine home values? And, do they really use the square footage information for a property knowing full well the wrong information they use may provide the wrong price? The answers may surprise you. And, like most things in the real estate business, it depends on who you ask.
Many appraisers are now claiming that MLS members knowingly use inaccurate square footage information. Many agents don't report a specific square footage number at all, mainly due to fear of liability. But, many appraisers (and many others) are starting to question the real estate industry's responsibility; to home owners and to their peers. The square footage details listed in MLS change property values. A number that is often taken for granted, is actually one of the most powerful numbers in real estate. This one number changes home values in CMA's, BPO's, appraisals, and AVM's. It changes insurance rates, tax values, etc. And, that number turns out to be wrong more often than it's right. Even after appraisers call the listing agents (after closing) to tell them the accurate square footage number they calculate during the appraisal, in MLS, that wrong number is rarely changed. Many agents know full well the number is wrong; they also know it will be used by many other real estate professionals to calculate home values. But, too many Agents just don't seem to care. It's a problem with no easy answers, so they choose to ignore it and hope no one will discover just how bad the problem is. When it comes down to the hard cold facts, many listing agents determine home values using square footage information they know is flat out wrong. They choose to use it anyway, rather than choosing to spend the time or money to get the accurate number, which is obviously in their client's best interests. So, is that considered fraud?
Many Realtors® are using information they know is inaccurate to help them determine a listing (or offer) price. That’s a pretty strong accusation. But, it’s one that appears to be true and can actually be easily proven. The problem with the square footage information in MLS is so big that no-one really wants to talk about it. There are no easy answers to solving the square footage debate, which is over a century old. However, appraisers have been pushed into a corner, up against the ropes, and they have started swinging back. Many appraisers are finally starting to tell this story; the same story over and over again, all across the country. Bob Graham, a residential appraiser in New Orleans said: “MLS here is ridiculous. Listing agents have completely stopped doing their job. And, I can’t do my job unless they do theirs first. Appraisals are only as accurate as the local MLS allows them to be, and that’s getting worse all the time.” That same sentiment was echoed in state after state; rural, suburban, and urban markets. Inaccurate information is an equal opportunity offender. With an already fragile real estate market, that’s frightening!
Want to see for yourself if this can possibly be true? Call a few experienced appraisers (in any county, in any state) and ask them about the problems with Realtors®, MLS, and inaccurate square footage. They see it every day and this one issue can make their jobs almost impossible. The appraisal industry has been force-fed massive reforms. The HVCC may be gone now, but the complete appraisal business model is gone. All these HVCC changes (which did no more than put a Band-Aid on the dyke), without the government even acknowledging that the appraisal industry can only provide accurate appraisals when they have accurate MLS data (including accurate square footage details, and something MLS doesn’t provide even half as much as they have in the past), have done little to improve the "quality" of the appraisal industry. Don’t think the size or square footage of a house can make that much difference? For the skeptics, I offer you this simple challenge.
Find three unaffiliated Realtors® (in any city) and get three CMA’s for the same property. What you will find is; the very simple, all powerful, most often used formula to determine the price of a home; price-per-square-foot. Everyone (in and out of the real estate business) seems to know this simplistic formula. Just watch HGTV®; this simple calculation is being taught to a whole new generation. It’s the same process in every market and it’s the most frequently used method for professionals to determine the value of your home. When agents use this method, they only have a few options for information. If their square footage data is wrong, their price-per-square-foot average is wrong, so their listing price is also wrong. Then you get a domino effect; changing one wrong number into two, three, and so on; until the final numbers created by using MLS data are a long way from the actual current values.
The second thing you may discover is three different square footage totals (if the agents actually measure the house). There is no nationally mandated measurement standard in the real estate industry, so many different methods are used to calculate "finished" square footage. The other possibility is that all three square footage totals may be the exact same; all taken from the local assessor’s office. Chances are that number (from the tax department) is wrong; in error enough to alter the value of the house. Either way, the homeowner is virtually unprotected and left to the mercy of the local tax department as the expert that calculated the square footage information for their home. A number that most homeowners assume their agent will provide as part of their (6%) listing fee.
In the humble beginnings of the MLS, every listing agent (or someone from their office) measured every home. It was a standard part of the full service Realtors® offered; service that was always
included in their original fee/commission structure. MLS is advertised as the “most trusted source of real estate data in the world." But, check MLS these days and you will find the pages infiltrated with information taken from the local tax office, which will quickly tell you that the numbers are based on an exterior-only inspection, and are nothing more than an estimate of size for assessment purposes only. And, an estimate that was never designed or intended to be used by the real estate industry. When the internet explosion happened in the mid-nineties and agents discovered fast and free square footage data, they looked at public records as a gift from heaven. They get a specific number and could make a simple disclosure to get them “off the hook,” if the square footage number was wrong. And it did; at least until a few lawsuits were settled (and appealed and settled) over the last few years. Now it seems a disclosure (no matter how well written) will NOT keep agents from being held responsible when (and if) they report a specific square footage number.
Whatever number the listing agent reports to MLS, the appraiser will eventually calculate the square footage. And, too many times the numbers do not agree. Let’s just say that number is off by 200 sqft and is taken from tax data. When that agent determined a listing price for that home, they came up with an average price-per-square-foot for other homes that have sold in the same neighborhood. They take that average and multiply it by (what they decide to use for) the square footage of the home they are pricing. If a 200 sqft error is priced at $150.00 per-square-foot, that equals a thirty-grand ($30,000) mistake. And, the errors are often much worse. That simple formula is used everywhere and works very well when you always have accurate square footage data. However, without national standards for measuring square footage, the MLS and square footage debate is basically in chaos. There are hundreds of variations on how to measure a house. So, even when agents do measure a home, the number can be totally different. Consumers are often left totally unprotected, with their home value dependent on which Agent they select.
Nobody in the real estate industry really wants to talk about this problem. Maybe they figure what the public doesn’t know won’t hurt them. Too late; it already has. This well-kept secret helped fuel a full blown real estate crisis. Certainly not the sole cause, this problem did help run the prices up at unrealistic paces; often based simply on the wrong square footage data.
The real estate industry uses this simple formula to calculate home values. It’s just a fact of the business. A value based on only two numbers; the price and the square footage. While the “sold price” is a verifiable fact, the square footage number is another story altogether.
Before you buy or sell your next house, have an appraiser (or an experienced agent) measure the square footage BEFORE you determine the listing (or an offer) price. It will help you get a fair value for your home.
The MLS came out in 2011 with the RPR® - Realtor’s Property Resource. Being advertised as the “gold standard” in real estate valuation, the NAR appears to be trying to take work away from appraisers and claiming that they can provide more accurate property values than any other valuation service. After all, they are the real estate experts and MLS is the exclusive information of the experts; or is it? Many foresee the future of the mortgage industry with fewer appraisers and more Automated Valuation Models. For consumers, this is a nightmare in the making.
The public has been offered a scapegoat to help them get through the real estate crisis. Don’t be fooled by the small percentage of appraisers who fudged property values that made national news. There were just as many (or more) lenders and real estate agent’s right there alongside those few bad apples. They are gone. The real culprit could have been all those crazy loan programs. The ads were everywhere; low down payment, no down payment, no doc; easy money was in your face. No matter where you lived, you couldn’t hide from the 100%, no money down ads. Unless you lived on another planet, you knew that everybody was buying real estate and cashing in on the real estate boom; easy money and profits to be made. And, profits will be made, just not by homeowners. Banks are ending up owning a huge slice of America. Big banking appears to be working very hard to take appraisers out of the mortgage lending process. The only people that tried to watch out for consumer’s best interests in the mortgage lending process are the ones that were blamed for much of the real estate crisis. If not for the appraisal industry, the national real estate market would be in much worse condition than it is today. What a magnificent sales job. Remember the Golden Rule; the one with the Gold - makes the Rules.
It’s hard for the real estate industry to say square footage is not that big of a deal, when every home they price is based on a price PER SQUARE FOOT formula. Realtors advertise PPSF every day; use it in CMA’s every day; but then say they are not responsible for providing it for the homeowner. How can any home be fairly priced without knowing the accurate size of the dwelling? The answer is – it CAN’T. Stay tuned…
TULSA, OK -- For most folks who are looking to buy a home size matters. But buyers looking for specific details about square footage are discovering just how hard it is to find that information. Home for sale. Four bedroom. Four bath. Three-car garage. One number likely missing from the listing? Square footage. Due to a lawsuit, Bowman vs. Presley, Realtors are opting out and not posting square footage stats to protect the real estate industry. "It's very difficult for agents or appraisers to assure accuracy because Realtors are not the ones that measure the homes," Sheryl Chinowth, Chinowth & Cohen Realtors, said. "The measurements are done either by court house records, which are not always accurate, or also by appraisers and builders. Because the Oklahoma Supreme Court allowed the lawsuit to move forward in June (09), Realtors were put on notice to make sure square footage is accurate. "It's similar to using more or less," Chinowth said. "When you have this many square feet more or less." But Sheryl Chinowth, a real estate broker, says measuring is subjective. She says second levels, stair cases and open areas make uniform measuring difficult and viewpoints vary. "Builders measure differently. Most builders go wall to wall or frame to frame," she said. "Appraisers measure differently and it's rare that you will see two appraisers measure a home exactly the same. The lawsuit says its fraud if a realtor passes square footage information on to the buyer and that number turns out to be incorrect. That puts the Realtor's license in jeopardy. However, Chinowth says through the Greater Tulsa Association of Realtors, a waiver and release form was developed for sellers to give the square footage information to the buyers. However, another recent lawsuit may set another precedent that any disclosure does NOT release the agent from their responsibility or “due diligence.”
She also says there is a new system that allows three square footage estimates to be put into the MLS system. Then that way the buyers can decide which square footage seems most accurate to them. Chinowth says people don't buy homes specifically for square footage, but she says if you must know, you can always get your own square footage appraisal. Frightening; the “experts” don’t know, but think buyers might be able to tell the difference… In a poll of 1,000 homeowners, 94% said they assumed their Agent measured their home and was responsible for making sure the square footage total was accurate.
I hate to point out the obvious, but if Agents price every home using the price per square foot formula (which only uses two numbers) shouldn’t both those numbers be right? How they can provide a listing price in good faith, or with any degree of responsibility, while knowing the square footage number they use in their CMA is more than likely wrong. That’s advising a home seller about their single largest lifetime investment, based on data they know is wrong. That’s crazy! No other industry could get away with that. Why are Realtors not held to the same standards as the rest of the world? And we wonder why we had a real estate crisis?
The true measure of that answer may lie in your local MLS.
Don’t most buyers ask the question “what should we offer?” It’s part of most real estate transactions. How does their agent advise them? What knowledge is an agent required to have to help these buyers determine a fair price for a home? For such a large decision, they look to the real estate professionals to help them. And, where do the real estate experts go to get this magic number? Most go directly to MLS and then use the price-per-square-foot valuation formula.
Chances are, the listing agent didn’t measure the house and no one really knows the size of the house. Yet this expert advice is based on taking an average price-per-square-foot and applying it to the subject property. Can it really make that much difference?
Example: House “A” is listed at $359,900. The average price-per-square-foot of the last five sales in the neighborhood is $179.95. The 1st agent measured the house and found out it had 2,340 square feet. They placed the value at $421,000. The 2nd agent uses the square footage total listed in tax records of 2,112 square feet. The value they came up with was $380,000.
A difference of $41,000. Is that enough difference to matter? If that’s my $40 grand it certainly does. And, these mistakes can be much worse, costing home sellers millions every year.
Guess what… You just got shorted an extra $40,000 in a down market. The price is already lower than you originally paid and now the agent makes a $40,000 mistake on top of the already low price! That’s NOT a surprise you want to discover.
And what about that six percent real estate commission? We always hear that the agent buyers and sellers actually work with only receives a small percentage of this fee. Does the seller care? NO. At the closing table on a $400,000 house, there is still a deduction of $24,000 taken out of the seller’s account. It doesn’t matter if it’s split four, five, or six ways, it still cost that seller $24,000 to get their home sold. Buy a car or sell your house – same value? Pull out your checkbook and write out a check for that amount and see how it feels. This is real money and a very hefty amount regardless of the service. The question is not really the exact amount of the fee, but the value for that fee. The Realtors® role, and value, has absolutely changed because of the internet and many believe the perception of “service” has been declining for the last decade.
Many contracts now have a “due diligence” period in which the buyer has time to have the home inspected, appraised, work out loan details, and decide if they want to proceed. Does the seller deserve a “due diligence” period prior to listing their property? It certainly depends on who you ask. Before the house goes on the market the Agent comes out with a big stack of forms to sign, shows you color graphs and photos, and everything looks very impressive. Your new Agent states: “Our information is based on the latest market statistics.” We guarantee we’ll work hard (or some similar) and claims they are the very best in the local market. They are so precise, and dot every “I” and cross every “T.” However, the price they suggest as the home’s listing price is based on a guess. Unless that agent measures the house prior to taking the listing, any value they provide may be nothing more than a guess, based on an estimate.
Realtors® are the real estate experts. Does that expertise include finding out the accurate square footage of a home, so they can calculate the value accurately? Most state licensing agencies require brokers to have this knowledge. Should a homeowner expect to receive the service and skill agents are required to possess? It depends…
Agents have a great deal of responsibility and it’s a tough business; especially in this market. However, like most businesses only the strong (and smart) survive. That’s why they earn $6,000 for every $100,000 of the home’s value. Realtors® are not experts in everything, and they do not have to measure any house. However, they must accept the responsibility of creating a home’s accurate square footage prior to determining a value, and also reporting that information in MLS. That data allows for the comparison of all other properties. If an agent doesn’t want to measure a house, no problem. Just ask (or hire) a competent professional to get the number. The number that starts the entire home valuation process.
It’s a new real estate market that needs to get back to some good old fashioned service for their clients. The technology is great, but at the heart of it all is that magic formula - price-per-square-foot. Until that changes, the real estate industry must find a way to agree on one definition of a “square foot.” Every buyer and seller just wants to know they are getting a fair price.
What a bold word; fraud. But, if it fits should we not say it out loud? As usual, it depends...