The Three Biggest Problems with Real Estate Pricing : The World of Residential Square Footage
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The Three Biggest Problems with Real Estate Pricing

by Hamp Thomas on 04/06/19

Problem number one - People trust the values in public records. Over the years, far too many real estate agents have explained to home buyers and sellers that the local tax department provides the “Official Record” for square footage. Consumers have learned to trust the information listed by local tax departments. Let’s see how this can be a problem.

There was a retired certified public accountant who purchased his home at a very good price and then spent about $50,000 updating the property. He recently received his 2019 revaluation notice and immediately became angry. He went straight to the Tax Department carrying a list of improvements and insisting his tax value be raised. The tax assessor happily agreed.  

He had received all the permits from the county for his remodeling, but none of that was caught by the assessor. The new revaluation didn’t include any improvements and the county quickly agreed to raise his assessed value. And, of course, raised his taxes accordingly. He is quite happy now and so is the tax department. Why would anyone be happy to have their taxes raised? He said if he decides to sell the property in two or three years, he didn't want the tax value to be the reason the sales price was low. He made the assumption that the tax value and the sales price would automatically be very close together. Why? Because at some point in time, a real estate agent had told him that it always worked that way. Why do people continue to share this misinformation (one value has little to do with the other)? It is because Realtors®, much too often, do not understand the difference between a tax assessment and a market value.

In another case, I had just completed an appraisal on a property and the owner asked me if he could take my appraisal and turn it into the tax department. I said sure you can, but told him I was curious as to why he would want to do that. He told me that he needed his tax value raised because they were thinking about selling the property in the next year and they needed a higher value. When I asked him who told him that, he said a friend of his was a Realtor® and suggested it would be the best way to increase their sales price.

Bottom line is that consumers believe their tax values and market values are closely linked. They have been taught that you always want your tax value to be as high as possible if you’re thinking about selling in the next few years. Otherwise, leave it as low as possible so you don’t have to pay unnecessary taxes. The truth is, one should have no bearing on the other.

Problem number two – the “Official Record.” A local agent had a new listing and asked me to measure the property. I measured the house at 2,201 square feet. The tax assessment listed the home with 1,640 square feet. The difference was 561 sqft and the owner had made no additions to the dwelling. The house was listed for sale in the MLS and within twenty-four hours an agent who lived in the neighborhood called the listing agent. He called to explain that her square footage information was incorrect and the house was way over-priced (he may have been upset his neighbor listed their home with a different agent). He told her the tax records had the square footage listed as 1,640 and that she had made a mistake, and needed to change her listing information. He was adamant that the tax department was always accurate (within a very small margin of error, he said). She explained to him that she had the property measured by an appraiser, and per the North Carolina Real Estate Commission Guidelines, the property was 2,201 square feet.

The agent didn’t trust her answer and took it upon himself to call the local tax department and ask them to verify the square footage information. The tax department came out to the house and remeasured. The square footage was raised to 2,201 square feet. At that time, they also raised the homeowner’s taxes accordingly. The homeowner was furious that this agent, who had no ownership interest in the house and no real interest other than being a nosey neighbor (and wanted to be smarter than his agent), decided to call the tax department. The owner eventually sold the house and the new owner could thank the neighbor for having their taxes raised. Just imagine if this owner had used his neighbor as his agent. That agent would not have measured or had it measured, would have used 1,640 sqft from tax records, and priced this home way below what the fair market should have been. With the eventual sales price and the difference in sqft, the owner could have lost $69,000. WOW! This happens all the time and is real money being lost based on nothing more than a difference in the size of the home, because the listing agent trusts the tax department’s square footage numbers.

To be fair, the tax department would have probably caught the change when the property sold. The real problem comes in with the agent who was absolutely positive the listing agent got the square footage wrong and that the tax department had it right. Anyone who studies tax records for very long understands that sqft errors are a normal part of the tax records. Tax departments measure from the exterior only. Without going inside each house, they have to guesstimate many measurements. Especially in homes with upper and lower levels, they are forced to guess at what’s inside and how it is finished.

Why do some agents believe so strongly in the accuracy of tax records? Because a few agents, who didn’t want to be responsible for measuring square footage or the fear of liability, decided to tell everyone that tax records contained the “Official Record” for square footage. Agents all across the country, who were eager to avoid the square footage issue, jumped on the bandwagon and spread the news of the “Official Record” for square footage. It’s still happening today all across America. However, it is not now, nor has it ever been, the tax department’s job to get precise square footage details. They do a very good job getting the information they need for assessment purposes, but the tax department has no interest or responsibility to the real estate industry.

Thus, the “Official Record” myth was born and from the late 1990’s, it has steadily increased. Today, it appears to be the norm among agents and homeowners. It is a sad state of reality in the real estate industry. Agents base listing prices on the square footage details contained in tax records. This creates property values that are either way too high, or way too low. Then, appraisals come in low and they wonder why there is a problem. Rarely do they figure out there is a problem with the square footage. The fact is we live in a price-per-square-foot world. If you change the square footage total you change the home’s value.

Problem number three - the Realtor® Price Fixers.

The third problem comes in with the real estate agents who believe they know better than everyone else. It becomes a game where each agent thinks they can get more than the next agent. Whatever one house sells for, the next house must be higher. Even if the house is bigger, newer, in a better location or better condition, but just because they want it to be higher. A small group of Realtors® in each area decides that they can control any specific market and they're the ones in charge of real estate values. Appraised values don't matter. Unfortunately, they have too much influence in our current system. They instruct home buyers that the appraisers can't keep up with the new rising values and that it's okay if the appraisal comes in low. They convince homebuyers that the prices are increasing and they need to buy now before the prices go up even higher. This small group can make prices rise 10 to 20% in an area or neighborhood. Within one year, they can dramatically change market values in a specific market, especially in certain neighborhoods. It really becomes a game of who can get the most and make the deal close, knowing they overpriced the home. It usually works, at least for a little while. But, it's more because of personal opinion and pride than the market’s reaction to current values. They think that they know better than every other real estate agent and every real estate appraiser, and they are convinced that they can get the homeowner more money for their home. What homeowner doesn't want to hear that their home is worth more money? Two weeks ago I listened to an agent with five-years experience explain to me that he could raise prices as much as twenty percent and find some appraiser to make the deal work. He said he has done it several times and was proudly telling me he knew much more about pricing than I did. “You have been doing this for so long (25 years +), you don’t recognize the current market as good as I do. Proving the value is what I do to a buyer,” the rest is not my problem.” That’s sad for other agents (where a good buyer’s agent might advise their client a home is over-priced), appraisers, and especially to the home buyer who overpays.  

There are also agents who want to push closing costs and down payment money. They convince buyers and sellers to agree on a price, and then they just add whatever money the buyer needs to close on top of the contract price and write a new contract. Then they fully expect appraisers to make the value cover the additional costs. That should be wishful thinking, but it’s just like the pricing game. Certain agents think they can convince the appraiser (or the lender to pressure the appraiser) that the higher value is fair. Then we end up with buyers who have no money invested in the house so they can simply walk away if anything changes. Sound familiar? It’s frightening and starting to happen again in many markets. New loan programs are starting to show up with little money down, stated incomes, etc. It’s like the past never happened. With banks wanting to increase loans (and profits) again, they are pushing the limits so they can boost profits, again. Profit – crisis – repeat…  Not a good plan for consumers.

So, we must teach consumers to stop putting so much faith in tax values and in Zestimates®. That is NOT the way to determine the fair value of your home. We must also educate agents (and home-buyers and sellers) that the square footage details listed in public records are not to be trusted; not to mention, that your tax value does NOT have a direct impact on the listing value of your home if you decide to sell. Before any home owner ever determines a price for their single, largest, lifetime investment, they need to invest in a home measurement first. Or, perhaps an agent who understands the true power of price-per-square-foot and has every home measured BEFORE they ever create a CMA. And, they create their own CMA, without relying on Zillow® or any online valuation program. True and fair real estate pricing requires a few old fashioned services; a home measurement and a selection of fair “comparable” sales, not the list of every home that sold in a two-mile radius and an average of all the numbers. Time to go back to some good old-fashioned real estate service, the way it was between 1908 to 1995. It’s also time for the real estate and appraisal industries to mandate one measurement standard, so homebuyers in all parts of the country can get their home measured the same way. Until the industry takes the guesswork out of measuring square footage, agents are not likely to focus more on square footage and take the risk. It’s time for the real estate industry to join the rest of the standardized world.

 If you want a fair home value, have it measured by the ANSI® Standard, and do NOT put your faith in automated valuations or tax records. 

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