The World of Residential Square Footage
HomeArticles & InfoBooksBlogCoursesYouTube Videos


  Institute of Housing Technologies
Improving the Real Estate Information Network

The World of Residential Square Footage

Rising Markets - Proof or Not?

by Hamp Thomas on 03/22/16

Let’s talk about “Rising Markets.” We hear this term more and more often and many Realtors are claiming that appraisers just don’t understand what is happening and are flat out killing deals for no good reason. Pretty strong statements and many times, way off base.  

In a true “rising market,” there has to be some evidence and history. Obviously, one sale doesn’t define a rising market. So, who defines a rising market and what data do they use to support that opinion? If they’ve seen multiple offers for the same house and this happens on every new listing in an area, there’s no doubt you have a rising market. In those cases, agents and appraisers should be able to point to the listings that have sold above list price, and be able to determine a percentage of rising values. If you have the last five houses that have sold at between five and six percent above the listing price, you have a pattern that can be documented on paper. It’s “proof” that an appraiser could use to show the rate of rising values and not have an issue with a low appraisal. Agents should be able to help appraisers in these circumstances and if it is truly a neighborhood with escalating values, there has to be some evidence of that growth. And, this kind of information should be reported in the Closed/Settled MLS data!

However, just because an agent convinces one client to pay more than list price does not equate to a rising market. True rising markets have real proof and appraisers deal in facts. Sometimes, the appraisers are not to blame for a low appraisal. They are simply trying to protect the home-buyer and the mortgage lender. As long as you are working with a local appraiser, you should not have a problem in true rising markets. 

Zestimate Gone Wrong

by Hamp Thomas on 01/05/16

Once again the Zestimate has a home-owner up in arms. In a small town in North Carolina a home just sold for $20,000. It was listed at $55,000, then reduced to $45,000, and finally sold in 2015 for $20,000. Safe to say it needed a little TLC. 


It was a shell in need of, well everything. But, we have to remember that automated valuation services don't know anything about condition or circumstances. Before the house was listed for sale, the owner (from a different state) thought they had inherited a nice little nest egg. Not a fortune, but if it was close to the Zestimate, they would have quite a nice amount to play with. 

The Zestimate in this case came in at - $139,973. Yes, you read that right. Almost $140 grand for a house, that even without the bad condition, was never worth anything close to that amount. Even the tax value was at $51,000. 

Think this home-owner was unhappy with Zillow? That's NOT a small error, it is huge and changes people's hopes and expectations. They had a very hard reality check. And, this is not some rare example but an everyday occurrence. 

As far off as most automated valuations are, big banks are still hard at work trying to convince the public (and the government) how accurate these electronic valuations tools are, and that real live appraisers are not needed any longer. It is frightening because they have to know the problems, but they choose to overlook them. Why? Simple answer, profits. The less appraisers are involved in the process, the more liberties they can take with the loans. "It's all about the people." I've heard that so many times and if they believe so much in the "people" they are loaning money too, why not keep the loans in-house? They don't care about the home's value because they are not holding the loan on their books. Same ole pre-crisis problems. 

Big banking is at it again and this has been the plan since the HVCC started - get rid of appraisers. At the end of every discussion, it all comes down to money and profits. Banks are looking for new ways to add profits and the appraisal industry is on their radar. Don't be fooled into thinking banks are pushing E-Valuations because they trust them or think they are good for consumers. E-Valuations are good for one thing - bank profits. Welcome to the new home loan with at least two appraisal charges - both an online service - and both not worth the paper they are printed on. When will the madness stop???

Why Does Square Footage Matter To Me?

by Hamp Thomas on 03/21/15

Many agents have asked; “Does this square footage stuff really matter to me? Isn’t it more of an appraisal issue? Fair questions. Let’s take a look at one sale where the agent now understands just how square footage affects a listing value. It was a hard lesson in the importance of square footage, and one they will not soon forget.  

The house was listed at $259,900. The tax records showed the heated living area as 2,318. After completing a CMA, it appeared that most homes in the neighborhood were selling between $110.00 and $114.00 per-sqft. Taking an average of $112.00 and applying that to 2,318 sqft, the agent and owner agreed to list the house at $259,900. There was never a discussion of measuring the home, no talk of the square footage from the appraisal when they bought the home, there was never any discussion about square footage. It was simply assumed that the square footage in tax records was accurate. It is the “official record” according to many agent’s viewpoint. This was just the way it was done in their office, and the thought of any potential square footage problems never entered the thought process.  

The home stayed on the market without an offer and, after six months, they decided to lower the price. They decided on $254,900 and felt they were offering a good deal too any potential buyer. At this price, they were listed at $109.97 per-square-foot and at the very low end of properties in that neighborhood. The agent was confident this would do the job and they waited. Sure enough, within three weeks after the price reduction they received an offer.

The first offer was $248,000 and after a great deal of conversation, they countered at $252,500 and thought that was their bottom line. For them, who paid $183,900 six years ago and had spent a great deal of time and money working on the house, they just knew the house was worth that amount. They didn’t want to lose the buyer, but also didn’t want to give the house away too cheaply. This time, the buyer said “YES” and the contracts were quickly signed. Feeling partly relieved and partly like they took less than they should have, they decided to focus on the future and find their new home.

They spent the next two weeks looking at every home available on the other side of the county and closer to the husband’s new job. They finally found “the one,” and worked out an agreement to purchase their dream house. The money was tight, but they had just enough for the down-payment with the proceeds they would receive from the sale of their home. Excited about their new home, they looked forward to the move.  

Everything was starting to fall in place. The utilities were scheduled to be changed and the moving companies lined up. The home inspection had gone through without issue and as soon as the appraisal was finished, they were set to close. The day of the appraisal came and the appraiser walked through with note pad in hand, taking pictures and pulling a tape measure. The appraiser said thank you, good luck with your move, and he was gone. They thought that seemed pretty painless and felt good about everything coming together.

Three days later the phone rings and it’s their agent. He is in a panic. “Wait, slow down, what are you saying?” The agent tried his best to get it out; the house appraised at $239,000. The buyers are not willing to pay more than the appraised value and we’ve got to get together to talk about our options. Feeling overwhelmed, they agreed to meet the next morning. When the agent showed up, the home owners felt there was something more to the story and asked “how could this happen?” Is this appraiser an idiot? We priced it below where it should have been.

“That’s not it,” the agent told them. “We do seem to have lots of problems with low appraisals these days, but in this case we have an issue with the “size” of your house. I’ve never had this happen before and we have to get this re-checked, and fast. I’ve asked another appraiser to come out and measure your home, just to be sure. Then we’ll decide if we can fight this low appraisal. But, I have your home listed with 2,318 sqft and this appraiser came up with 2,146 square feet.”

The second appraiser came out and carefully measured the home. About two hours later they got the call. This time, the measurements came in at 2,148 sqft. In either case, that’s well below the tax department’s measurements of 2,318 sqft. 2,318 minus 2,148 equals a difference of 170 sqft. That is a huge difference. If you do the math, at $239,900, with 2,146 sqft, that comes out to $111.79 per-sqft. That’s really close to what we thought it should be, and the only difference is in the square footage total we used to calculate the price. I can’t believe the tax department has this large of a mistake. I’ve never seen anything like this before. But, at this point, the appraised value appears to be fair. I am so sorry this happened.

After all was said and done, the buyer was not happy about getting a smaller home than they had been told and were afraid there might be other problems, and they backed out of the deal. The seller could not move forward with the purchase of their dream home, and those sellers also lost a deal on the home they had under contract. When the dominoes stopped falling, six transactions had been killed or delayed. It took a lot of people a lot of time, and caused a great deal of stress all around. Talk about a bad day!



The original listing agent could have avoided all these problems by having the house measured, before they ever determined a listing price. One agent that didn’t think square footage was important, ended up causing a very bad series of events that influenced the lives, hopes and dreams of a large number of consumers (and other agents). So, the next time someone asks you if square footage “is really that big of a deal?” You might want to say that, like most of the real estate industry, “It Depends” can apply to almost every situation. This case might be an extreme, but it’s not as rare as you might think and deals are lost due to nothing more than the square footage number used to calculate the list price. Indeed, Size Matters!
 

The CU, Realtors & the Future of MLS

by Hamp Thomas on 01/23/15

For 10 years I have been screaming about sqft problems within MLS and tax records. The problems are real and happen in most states. Some counties are better than others, but without going inside the house, the tax assessor can only do a so-so job. It’s bad enough on two story homes but especially bad on homes with basements. If you’re lucky enough to live in an area without basements, count your blessings. For those of us where basements are common, the CU is going to expose the unprofessionalism in reporting square footage that agents get away with every day. Maybe then we can convince Realtors that “their” info does matter and sqft classes will be on the horizon for every real estate agent.  The “Machine” will never work because appraisal is an art (opinion) not a science. Big data is just dots and dashes without the ability to select the right info and analyze the data. A computer can’t do it, not accurately. The MLS (and the public records data that currently fills the MLS) is going to be uncovered for the information accuracy problem they have now, and that has been growing since the mid-nineties. Their magic price-per-square-foot formula doesn’t work with inaccurate data and if you don’t think agents use price-per-sqft, check out a few CMA’s. Also check out HGTV®. They teach consumers every day about that over simplified magic formula that prices the American dream. Get ready for the square footage revolution! The good fairy DOES NOT work for the local tax department and providing accurate sqft information should be the responsibility of the listing agent. If they want better appraisals, they need a better MLS. Time to turn attention away from appraisers and towards Realtors®. And yes, I am also a Realtor®. (:  

Where Do You Get Your Square Footage Number From?

by Hamp Thomas on 11/25/14

This numbers matters more than you might imagine! Just this morning I found a large brick ranch that was reported “Closed” with 3,880 sqft. I had done an appraisal about a year ago and measured it at 3,511 sqft. Nothing really complicated, just a basic design. That’s a difference of 369 sqft. That works out to a difference of $9.86 per sqft. Doesn’t sound all that bad, but if the next house in that neighborhood sells with 3,000 sqft, that works out to a difference of $29,580. That thirty grand might be just enough to create a low appraisal and cost someone a sale.

This is a very real problem and the mistakes are often much larger, especially when the info is taken from the tax records. Remember, the Real Estate Commission specifically states that you should NOT use the sqft reported in tax records. The mistakes would shock you! The vast majority of your peers use price-per-square-foot in some manner to determine values. It influences listing prices, offer prices, appraised values, and it happens every day. Your best bet is to make one call to the appraiser who did the report for the buyer (unless you had a prelisting appraisal), and ask for the square footage total. Use that number to report to MLS. This can make our MLS better and make all of us better at our jobs. 

Appraisal Adjustments, AMC’s and Talking to a Brick Wall

by Hamp Thomas on 08/21/14

The passion of many appraisers faded with the HVCC and completely went out when Dodd-Frank showed up. When you have to work for someone else (AMC’s) and work harder for less money just to make money for them, then any passion for the job is lost. Appraisers need to be concerned about protecting consumers (and lenders), but most of their reasons for doing so have been taken away. Nobody wants to hear their opinions of value. Banks only want a form to fit percentage guidelines so they can make their loans work. It’s sad to see the lenders that appraisers are trying to protect still don’t seem to want their protection. The true property value appears to concern no one but the appraisers.

The government took one problem and made it into five more to supposedly fix “it,” although the “it” in question is debatable. Did it really fix anything? If we read the news, the lending industry is full of fines and penalties (in the billions-17 Billion announced today for Bank of America), while they keep on making more. But, the little guys (appraisers) are still under the scrutiny of people who really know very little about the industry. It’s like Ambulance Drivers trying to tell Doctors how to do their jobs better.

“I love this profession but cannot stand the business. I am totally burned out. It is so stressful I get physically sick. It's no longer worth it to me.”  Too many lines like this are posted in appraisal forums and blogs every day. Appraisers are being insulted and intimidated, and I have to ask “what has really changed?” A quality appraiser loves the challenge of creating a fair value and doing everything in their power to be the voice of reason in an emotional process. Everyone else is motivated by a paycheck. Agents and lenders only get paid if the loan goes through and that sometimes allow s them to overlook things they should not. Appraisers are unbiased voices in a very tough business.

In the current system, appraisers can’t do their jobs the way they were trained. Appraisal is an art not a science and it can be deciphered by a computer program. If it was possible to put everything in the real estate valuation process through a computer system, AVM’s would be more accurate and could replace the appraiser’s role all together. It can NEVER happen, because real estate is a complex business and there are things an appraiser learns over the years that simply don’t fit into any standardized form. There are dozens of adjustments or differences between properties that must fit into a few lines for a computer to read.

There are only so many line items on the mandatory appraisal form and many times the numbers are not "black and white." Condition, quality, site, location, age, etc., there are numerous things that have to be considered in an appraiser’s adjustments. And, there is simply no room on the standardized form to adjust for such items. Without having room for far too many single line adjustments, the “condition” and “quality” adjustments are often a combination of a great many factors. It may be only a few things, or it can be a dozen items or more, on each comparable that have to be factored into the total adjustments somewhere.

And, try explaining the adjustments to an untrained or unlicensed AMC employee and it’s like talking to a brick wall. No matter how many explanations an appraiser writes, they don’t understand the language or logic and ask for more. For many appraisers, frustrating is an understatement.

There are many adjustment nuances in order to "fit" into the highly regulated appraisal underwriting guidelines. For instance: Differences in a yard, landscaping, the slope of the lot, the neighbor's $30,000 landscaping view or lack of maintenance, the pond, the trailer through the woods, the horse farm across the street, the abandoned warehouse one block away, the park two blocks over, schools, employment, etc.; the difference between laminate and solid surfaces countertops, hardwood vs laminate flooring, smooth ceilings vs popcorn; the difference between a 10x10 deck or a 20x14 deck with Trex type materials, a fenced back yard with a 10x20 wired section vs a six-foot privacy fence surrounding the entire back yard; location within the street/neighborhood, views, privacy, etc. etc.; or what is known as enjoyment of ownership; which is based on the total value, not just a price-per-square-foot. Or, one of a hundred other scenarios that must be consolidated somehow into a standardized form. While some adjustments may not appear logical or mathematically feasible, there is a total logic behind them based on an appraiser’s experience in the local market. On the mandatory appraisal form there is a reason for each number. The appraiser understands the reasoning, but a computer never will.   

You can see why it’s hard for appraisers to get excited about adjustments between a C3, C4, etc., when there are so many things that must be considered in a truly credible appraisal report. We have to decide if the appraiser should use their expertise to determine a fair value, or use their skills to fill out a form to make bankers happy. Appraisers solve valuation problems, and if you think earning an appraisal license is easy take a look at what is required. All the training that is required and then they are expected to earn a similar wage to an unskilled laborer? This system is destined for failure and death unless changes are made soon. And, consumers will pay the price for the downfall of the appraisal industry.

I say, train appraisers well and let them do their job. The more the government tries to fix the appraisal system the worse it gets. Bad appraisals account for only a small portion of the lending problems. Take the time spent trying to better appraisals and focus on the lending industry. And then, take a long hard look at the source of information that appraisers use. If you really want to uncover some problems, look to the MLS. The problems are easy to discover. It’s a nightmare that no one seems to want to talk about. Every appraiser knows of the mistakes and exaggerations in the MLS. Hec, most agents know about the problems. For me, after ten years of studying the MLS and square footage problems, many MLS systems are nothing more than advertising sites. The property details and descriptions are basically useless. Harsh, maybe. But very true.

Agents using inaccurate square footage data in their price-per-square-foot calculations cheats consumers out of millions every year. Appraisals are filled with mistakes that come directly from the MLS. There are lots of problems in the home selling/buying process that have nothing to do with the appraisal industry. Cumo got us on the appraisal bandwagon and it’s time to get off. 

Appraisal Adjustments, AMC’s and Talking to a Brick Wall

by Hamp Thomas on 08/21/14

The passion of many appraisers faded with the HVCC and completely went out when Dodd-Frank showed up. When you have to work for someone else (AMC’s) and work harder for less money just to make money for them, then any passion for the job is lost. Appraisers need to be concerned about protecting consumers (and lenders), but most of their reasons for doing so have been taken away. Nobody wants to hear their opinions of value. Banks only want a form to fit percentage guidelines so they can make their loans work. It’s sad to see the lenders that appraisers are trying to protect still don’t seem to want their protection. The true property value appears to concern no one but the appraisers.

The government took one problem and made it into five more to supposedly fix “it,” although the “it” in question is debatable. Did it really fix anything? If we read the news, the lending industry is full of fines and penalties (in the billions-17 Billion announced today for Bank of America), while they keep on making more. But, the little guys (appraisers) are still under the scrutiny of people who really know very little about the industry. It’s like Ambulance Drivers trying to tell Doctors how to do their jobs better.

“I love this profession but cannot stand the business. I am totally burned out. It is so stressful I get physically sick. It's no longer worth it to me.”  Too many lines like this are posted in appraisal forums and blogs every day. Appraisers are being insulted and intimidated, and I have to ask “what has really changed?” A quality appraiser loves the challenge of creating a fair value and doing everything in their power to be the voice of reason in an emotional process. Everyone else is motivated by a paycheck. Agents and lenders only get paid if the loan goes through and that sometimes allow s them to overlook things they should not. Appraisers are unbiased voices in a very tough business.

In the current system, appraisers can’t do their jobs the way they were trained. Appraisal is an art not a science and it can be deciphered by a computer program. If it was possible to put everything in the real estate valuation process through a computer system, AVM’s would be more accurate and could replace the appraiser’s role all together. It can NEVER happen, because real estate is a complex business and there are things an appraiser learns over the years that simply don’t fit into any standardized form. There are dozens of adjustments or differences between properties that must fit into a few lines for a computer to read.

There are only so many line items on the mandatory appraisal form and many times the numbers are not "black and white." Condition, quality, site, location, age, etc., there are numerous things that have to be considered in an appraiser’s adjustments. And, there is simply no room on the standardized form to adjust for such items. Without having room for far too many single line adjustments, the “condition” and “quality” adjustments are often a combination of a great many factors. It may be only a few things, or it can be a dozen items or more, on each comparable that have to be factored into the total adjustments somewhere.

And, try explaining the adjustments to an untrained or unlicensed AMC employee and it’s like talking to a brick wall. No matter how many explanations an appraiser writes, they don’t understand the language or logic and ask for more. For many appraisers, frustrating is an understatement.

There are many adjustment nuances in order to "fit" into the highly regulated appraisal underwriting guidelines. For instance: Differences in a yard, landscaping, the slope of the lot, the neighbor's $30,000 landscaping view or lack of maintenance, the pond, the trailer through the woods, the horse farm across the street, the abandoned warehouse one block away, the park two blocks over, schools, employment, etc.; the difference between laminate and solid surfaces countertops, hardwood vs laminate flooring, smooth ceilings vs popcorn; the difference between a 10x10 deck or a 20x14 deck with Trex type materials, a fenced back yard with a 10x20 wired section vs a six-foot privacy fence surrounding the entire back yard; location within the street/neighborhood, views, privacy, etc. etc.; or what is known as enjoyment of ownership; which is based on the total value, not just a price-per-square-foot. Or, one of a hundred other scenarios that must be consolidated somehow into a standardized form. While some adjustments may not appear logical or mathematically feasible, there is a total logic behind them based on an appraiser’s experience in the local market. On the mandatory appraisal form there is a reason for each number. The appraiser understands the reasoning, but a computer never will.   

You can see why it’s hard for appraisers to get excited about adjustments between a C3, C4, etc., when there are so many things that must be considered in a truly credible appraisal report. We have to decide if the appraiser should use their expertise to determine a fair value, or use their skills to fill out a form to make bankers happy. Appraisers solve valuation problems, and if you think earning an appraisal license is easy take a look at what is required. All the training that is required and then they are expected to earn a similar wage to an unskilled laborer? This system is destined for failure and death unless changes are made soon. And, consumers will pay the price for the downfall of the appraisal industry.

I say, train appraisers well and let them do their job. The more the government tries to fix the appraisal system the worse it gets. Bad appraisals account for only a small portion of the lending problems. Take the time spent trying to better appraisals and focus on the lending industry. And then, take a long hard look at the source of information that appraisers use. If you really want to uncover some problems, look to the MLS. The problems are easy to discover. It’s a nightmare that no one seems to want to talk about. Every appraiser knows of the mistakes and exaggerations in the MLS. Hec, most agents know about the problems. For me, after ten years of studying the MLS and square footage problems, many MLS systems are nothing more than advertising sites. The property details and descriptions are basically useless. Harsh, maybe. But very true.

Agents using inaccurate square footage data in their price-per-square-foot calculations cheats consumers out of millions every year. Appraisals are filled with mistakes that come directly from the MLS. There are lots of problems in the home selling/buying process that have nothing to do with the appraisal industry. Cumo got us on the appraisal bandwagon and it’s time to get off. 

Appraisal Bullying, Still Going Strong!

by Hamp Thomas on 08/15/14

Even today there is undue pressure being put on appraisers to make loans work. All the new regulations in the appraisal industry did nothing for the bullies who work for AMC’s now. It’s sad to hear veteran appraisers talk about the way they were disrespected and treated unprofessionally, and how they are making plans to leave the industry. It happens every day in appraisal forms and blogs all across the country. The bullying and intimidation is as bad now as it ever was before.

This would never happen in any other industry and there is obviously a huge discrepancy between how appraisers are trained and what the mortgage industry expects from them. Appraisers are taught from day one; protect the buyer, lender, and mortgage investor. Make sure the value is fair to the best of your ability. 100% imbedded in every appraiser’s brain; be ethical and fair, you are there to protect the public and are influencing large financial investments. Then they discover this is NOT what lenders want. They might say they do in public, but their day to day business operations tell another story. The lenders and AMC’s (who pay the appraisers) often could care less if the loan is secure, not their problem. Make the loan, get paid, and let the next guy worry about it. Sound familiar?

So, what has really changed? It appears not much in the mortgage lending industry. Oh, except for the fact that prior to the HVCC each lender handled appraisal ordering and reviewing, and paid their own appraisal related expenses. Now, they pass that expense along to an AMC, who in turn takes it from the appraiser. Yet consumers are paying more than ever. Not because of appraisal fees, but due to AMC increases, which are conveniently listed under “appraisal fees” on a closing statement. I’m still amazed that lenders do not have to disclose AMC fees to consumers. If they are not trying to hide something, why would they care about having their fees disclosed on a closing statement? Every single fee related to the home buying process is listed on a HUD1. All except one; AMC fees. It’s a flat out deception of the home buying public.

Let’s call a lemon a lemon. AMC’s are not in the best interest of the public and basically add zero value to the mortgage lending process. Far too many AMC’s are all about getting appraisals done faster and cheaper. They force appraisers to complete work so fast it has to hurt quality. Then, the reports lay around on some lenders desk until the rest of the process catches up. Do we really think the lending process is any faster now than it was prior to the HVCC? No way, it’s slower than it ever was, and it is now obvious the appraisal has no bearing on the speed of the lending process. Getting appraisals done cheaper only helps AMC profits. Appraisers have to do more work for less money, so what do you think happens to the end product? Try this process at your job, more work for less pay. It’s a system doomed for problems. And, those problems only hurt the consumers who we have been led to believe they are designed to help. There’s no logic in this process. It’s all about profits and power, certainly not consumer protection.

Appraisers are being harassed and threatened by untrained and unlicensed people (often in another country), that understand little or nothing about the appraisal business. They only know forms, distances and percentages. They expect perfection from a system where perfection is not an option. Real estate will never be a form filler, computerized process. At least NOT if you want accurate results. The AMC’s goal is to find a way to force the appraiser to make the loans work, whatever it takes. There’s even appraiser’s being blacklisted for not accepting their low fees. AMC’s are bully appraisers by saying you will work for what we tell you, or we will make sure you don’t work for anyone. That’s absolute intimidation and it should be illegal. But wait, it is illegal, but no one enforces it! File a complaint and an appraiser will never work again.  

How about an in-depth study by one of the television news shows looking into AMC practices? If the public knew what was happening and what they were paying more for, they would be outraged. And, they should be. The only ones being served by AMCs are AMCs (and big banking). Oh yea, remember the Golden Rule? This is a perfect example. The ones with the gold (big banks) are making all the rules.

Why teach appraisers to be so ethical and hold them to such high standards, when the people that pay them don’t want them to be that way. Talk about a communication gap! There needs to be an appraisal product that lenders actually want, that still protects consumers and mortgage investors, and that allows for some common sense back in the appraisal process.

For the appraisal industry, and most importantly for consumers, AMC’s don’t work as promised. The home buying public receives zero benefit from an AMC controlled appraisal industry. The only ones who win are the banks (who no longer have to pay for appraisal management), and the AMC’s (who literally got business dropped in their laps the day after the HVCC). They did NOT earn their place in the market, one government official gave it to them.  

When will it stop? When one politician stands up and says enough is enough. Remove the HVCC and Dodd-Frank from the books. Good try, but didn’t work. We are no better today than we were prior to the HVCC. Focus on lending practices and let appraisers do what they have been trained to do, the right way. Give consumers an unbiased appraisal and give the appraisal industry back to the people who actually care about doing things fairly. After seeing all the fines and penalties placed on the banking industry the last year (in the BILLIONS), I think it’s clear that the focus needs to be on the banking system. And after that, we need to take a look at Realtor® quality.  Remember, appraisers are only as good as the data they rely on. The MLS is another story, but is also is a large player in appraisal quality. It’s time to stop appraisal bullying for good and put some teeth in any new law.  


Citigroup Pays Record Penalty

by Hamp Thomas on 07/16/14

Citigroup will pay $7 billion to resolve claims it misled investors who purchased shoddy mortgage-backed securities that helped lead to the financial crisis six years ago, Reuters reported July 14. The deal includes the largest civil fraud penalty ever levied by the U.S. Department of Justice. The multibillion-dollar settlement is more than twice what many analysts expected but less than the $12 billion the government sought in negotiations with Citigroup.

All those who argue about the causes of the real estate crisis cannot discount yet another billion dollar settlement. Over and over again we see large settlements for mortgage securities fraud, where the problem was not with the appraisals, but the crooked financiers who manipulated the system, stealing money from homeowners all across the country. While appraisers are still being punished for the sins, big banks obviously have ample funds to pay these fines and continue with business as usual, while appraisers are being regulated to death. Every day more skilled appraisers are leaving the business while AMC’s steal profits and do little if anything to improve the home buying system. It’s time to take AMC’s back to the pre HVCC days where they can earn a market share the fair way, rather than by government intervention. It’s time to get the government out of the appraisal industry. Let's says goodbye to AMC's, and hello to sanity back in the appraisal industry.

Adjustments Fitting the Form-Real Estate Appraisal

by Hamp Thomas on 07/16/14

There are only so many line items on the mandatory appraisal form and many times the numbers are not “black and white.” Condition, quality, site, location, age, etc., there are lots of things that have to be considered in the adjustments (such as a back yard superior to another). And, there is simply no room on the form to adjust for such items. Without having room for far too many single line adjustments, the condition and quality adjustments are often a combination of a great many factors. It may be a few things or it can be a dozen items, on each comparable that have to be factored into the total adjustments somewhere. It took me ten years to learn all the nuances that “fit” into over-regulated appraisal underwriting guidelines. “Condition” adjustments they understand. Differences in a yard, landscaping, the slope of the lot, the neighbor’s 30,000 landscaping view or lack of maintenance, the pond, the trailer through the woods, the horse farm across the street, privacy, etc. etc.; or what I call enjoyment of ownership, which is based on the total value, not just a price-per-square-foot. Or, one of a hundred other scenarios that must be consolidated somehow into the form. Oversimplified maybe, but that’s a summary of what happens. While some adjustments often don’t appear logical, I understand the total logic behind them. On that mandatory appraisal form there is a reason for each number, even when it may encompass more than just quality or condition.  

Are Realtors and AMC’s Killing the Home Valuation System? In a word; YES!

by Hamp Thomas on 06/20/14

Many Appraisal Management Companies are now demanding that appraisers change the square footage details listed within their reports. Why? Because they saw a different number on Zillow® or in public records. How have we gone this far wrong?

Appraisers generally turn first to their own files for square footage details. Next, they turn to the MLS, which is touted as “the most trusted source of real estate information in the world.” Then, if there are no other options (like in the many areas where the MLS does not report any square footage details), appraisers are forced to turn to local tax departments to get their square footage details. And often, those details change home values, dramatically. In many states the governing real estate authority clearly states that agents should NOT rely on the information in tax records. Anyone who has ever worked around the real estate industry knows just how unreliable tax numbers can be.  Those square footage numbers were created by and for the tax department, NOT to be used in the real estate industry.

Companies like Zillow® and Trulia®, etc, most often get their square footage details from those same public records, that everybody else seems to know are unreliable. Then, along comes these appraisal management companies, where unlicensed people are trying to dictate what highly trained experts decide to use as a source for their square footage details. This only makes a declining system worse!

It’s time to stop this madness! It would seem to be in everyone’s best interest to have the most accurate real estate information system humanly possible, so our real estate and appraisal industries can function consistently and fairly. In order to achieve that goal, every house listed in MLS must be measured by a licensed appraiser, and the square footage details listed (by level) within the MLS. Then, we can get back to having fair property comparisons and quality appraisals.

All the talk about liability and agents not wanting to report square footage is just an excuse. If they are going to be compensated as experts, and best represent the home-buying public, they should demand the best possible information. It’s time for the National Association of Realtors® to create this one new rule. Consumer protection would increase dramatically, overnight. This is not rocket science. We live in a price-per-square-foot world and without accurate square footage details, our system simply doesn’t work. If you think price-per-square-foot doesn’t matter, check out any online valuation service or look at any agent’s CMA. One of the main pieces of data – price-per-square-foot.

Size does matter, and it’s time to put consumer protection back in the home valuation process.

 

What is Common Knowledge?

by Hamp Thomas on 05/19/14

There was a very good article by Stephen L. Fussell in last month’s Real Estate Bulletin that asked this very question and here are the examples he used.  

Examples of Common Knowledge

1. A plan by the NC Department of Transportation (NCDOT) to construct or widen a roadway that has been publicized on the NCDOT's website, in local newspapers, and/or local TV;

2. A city's plan to annex an area which will double the annexed areas's property taxes and which has caused much debate in public hearings and in local media. 

3. The fact that when a strong Nor'easter hits some coastal communities, there is increased risk of beach erosion causing loss of dunes, street flooding, and damage to ocean-front homes;

4. The fact that a storm drainage system in a neighborhood is inadequate to handle the abundance of storm water produced by thunderstorms causing widespread flooding when the citizens in the neighborhood have filed a highly-publicized lawsuit against the city to get the city to take corrective action;

5. The designation of a large commercial property as a Superfund site by the Environmental Protection Agency along with significant publicity that no cleanup efforts have been undertaken;

6. The location of a train station through which loud freight trains routinely pass during the early hours of the morning, where local residents have complained publicly for many years. 

----------------------------------------------------------------------------------------

The article talks about “Material Facts” and defines this as “any information that would affect a reasonable person’s decision to buy, sell or lease.” It adds that brokers are required to discover as well as disclose material facts.

It also states that “to determine what a broker reasonably should have known, we examine public records and ascertain whether the broker has taken relevant courses or has had access to publications, such as the Commission’s Real Estate Bulletin that would have educated the broker on the topic in question. We also consider whether the material fact was common knowledge. Prospective buyers, sellers, landlords and tenants depend upon their agents to inform and guide them in making good decisions.”  

This brings up a few questions that could be asked about square footage and common knowledge:

Would those publications also include the Commission’s publication “Residential Square Footage Guidelines?”  

Is it common knowledge for a listing agent to know that the square footage information taken from public records is likely inaccurate, and that you should not rely on this information?

And, if it is “Common Knowledge” to know that the square footage details reported in tax records are estimates only and were never designed and/or intended to be used by the real estate industry, it brings up many more interesting questions.

·         Should an agent complete a CMA for a potential seller/buyer using the square footage details listed in public records?

·         If an agent does use the square footage listed in tax records to help create a CMA, must this fact be disclosed prior to entering into any agency relationship?

·         Should an agent calculate any price-per-square-foot value for a home based on information they know is likely inaccurate, perhaps even grossly inaccurate?

·         And, if an agent knows (or should know) the data is inaccurate and they still use it as a foundation or basis for their expert advice, what are they guilty of; if anything?   

Per the “Residential Square Footage Guidelines” published by the N.C. Real Estate Commission:

 ü  As an alternative to personally measuring a dwelling and calculating its square footage, an agent may rely on the square footage reported by other persons when it is reasonable under the circumstances to do so. Generally speaking, an agent working with a buyer (either as a buyer's agent or as a seller's agent) may rely on the listing agent's square footage representations except in those unusual instances when there is an error in the reported square footage that should be obvious to a reasonably prudent agent.

 ü  An agent who relies on another's measurement would still be expected to recognize an obvious error in the reported square footage and to alert any interested parties.

 ü  Some sources of square footage information are by their very nature unreliable. For example, an agent should not rely on square footage information determined by the property owner or included in property tax records.

 ü  In areas where the prevailing practice is to report square footage in the advertising and marketing of homes, agents whose policy is not to calculate and report square footage must disclose this fact to prospective buyer and seller clients before entering into agency agreements with them.

With such an important number to the home valuation process, should the Real Estate Commission require all licensees to take a continuing or pre-licensing course about the topic of square footage? Like much of the real estate industry, “it depends” certainly applies to this topic. I bet you already have a strong opinion about square footage, one way or another. But, there is a lot of misinformation floating around. There are many areas of the Residential Square Footage Guidelines and the ANSI® Measurement Standard that many agents know little about, and the use and power of “price-per-square-foot” continues to grow. In order to ensure the highest levels of consumer protection, this is a subject that needs new educational opportunities. Perhaps in the future, we’ll see more about this highly controversial topic.   

The Official Square Footage Record, Agents Perspective

by Hamp Thomas on 05/09/14

Today I had an experienced agent who argued and argued that the owner was trying to hide something about the property. She was adamant that the seller had added a room to the property without a permit and was not taking no for an answer. Her basis for this opinion was that the tax records showed the sqft as 2,740 sqft and my appraisal stated slightly over 3,000. She said that the public records information is always taken from the builder’s plans and is 100% accurate when the home is built. If the sqft is different now, it’s because the homeowner has done something illegal. There was no changing her opinion that public records provide the “official record” for sqft and they are always accurate. The sad thing is she is not alone. Most agents don’t understand the square footage details that are listed in tax records. Don’t know, don’t care.

I say what planet do these agents live on? How often do we have to discuss this before they get the hint? There is no “official record” when it comes to sqft. The tax department has no interest in the real estate industry at all. It’s the listing agent’s responsibility to measure (or have measured) the homes they list in MLS. That was the whole reason the MLS was originally created, so that professionals could share accurate information that they created themselves. Once online records hit, way too many areas decided to hide from liability (or professionalism depending on your perspective) and started using the sqft from the tax department. The sqft listed in tax records is not meant to be precise. The mistakes are easy to find and if you work in the real estate industry at all, you simply have to know they are there. Appraisers need to complain more. While our industry gets regulated near to death, the information crisis in the MLS goes unnoticed. The “quality” of the appraisal industry will never get better until Realtors® are held to similar professional standards and the MLS information improves its quality. You simply can’t have one without the other. It’s time we started talking more about this and make it impossible for agents to keep below the radar any more. The public deserves to know that agents say that square footage is not that important when asked about it, yet if you look at 95% of all CMA’s you find their all-powerful price-per-square-foot formula. You should not be able to have it both ways, yet agents have been doing it for years. I’m still voting that NAR requires every house to be measured by a qualified professional, BEFORE it is listed in the MLS. If listing agents calculate prices on a price-per-square-foot formula, they need an accurate square footage total, before they create their CMA’s. One rule change and the quality of the MLS (and the appraisal industry) improves overnight. Let’s point the regulation microscope at the Realtors® and the MLS a while and let appraisers get back to reality. Rant over… 

Basement Homes and Appraised Values Gone Wrong

by Hamp Thomas on 05/04/14

In the majority of markets all across the country, it is virtually impossible to get an accurate appraisal on homes that have basements or lower levels. That’s a pretty big claim. Can it possibly be true? Absolutely it can! And, it happens every day. No one in the real estate industry wants to bring this topic out in the open for fear the public would be outraged. Well, it’s time somebody gets mad, and for all the Realtor’s® big talk about consumer protection, the real estate industry (Realtors® in particular) are doing a poor job in the real property information department.

Why are basement homes different from the rest? Fair question, and it comes down to the information appraiser’s use in their reports to compare properties. Where do they get their information? From Realtors® and the MLS. And, after studying this topic for over ten years now, I can say with great assurance that the MLS is filled with information that is just plain wrong. There’s no easy way to say that, but the appraisal industry should have been shouting this for years. This is not a new problem. I have personally contacted numerous people in the Realtor® organization, from my local association all the way up to the president of the National Association of Realtors®; all without acknowledgement. They appear to think square footage and lower levels is a topic best left under the radar.

Most agents don’t understand how appraisers report square footage, or how they value homes with lower levels. There is more confusion over this topic than just about any other. If the agents don’t understand the way the federally mandated appraisal forms work, how in the world can the public understand them? Appraisers are required (by law) to report finished living area as above and below grade. When they look to the MLS for this data today, it is not a priority for most MLS systems and accuracy is almost never discussed. It is a field rarely enforced, even by the associations that do require the separation. Many MLS systems don’t report sqft details at all. And, there are many MLS systems that simply copy and paste this info from the local tax department. Appraisers depend on the MLS for the majority of the data they use every day to create home values, but MLS systems are filled with this tax data and it is a trend getting bigger instead of declining. That leaves appraisers relying on the local tax department for basement sqft details and that cheats lenders and home buyers. A tax assessor never enters the house and any info is created from an exterior guestimate of what is inside. Whether it’s finished, partially finished, unfinished space; if the washer and dryer are there, a storage space, a wet wall or two; or a brand new Rec Room and kitchen, and an area finished just like the upstairs. With a permit the info is better, but still not complete. And, without permits, it’s a hodge-podge on inaccurate data killing home values across the country.

95% of appraisals on homes with basements or lower levels have errors, errors that affect the home’s value. Think about that. Sadly, it is NOT an exaggeration! For the tax department’s purposes the sqft information is accurate enough, they don’t need precise data. The real estate industry are the ones who need precise data, and they used to be the ones that provided it. That is until the internet exploded and agents got worried about liability. You would think for 6% consumers would want their agent to measure their house and price it fairly. But, that’s just not the norm in todays’ real estate market. I keep shouting that the NAR® needs a national rule that a licensed appraiser (or other qualified expert) measures every house, before it is listed in MLS. The MLS, CMA’s and appraisals would improve dramatically overnight. This one change would improve appraisal quality by 50+ percent on this type of property and all property. It would improve mortgage security and protect unsuspecting consumers.

The MLS is flawed and broken. Today it is an advertising website, not an information source created by and exclusively for professional real estate agents. Appraisal quality cannot improve until the MLS improves, that simple. Realtors® control the information that controls the quality of every residential appraisal.

 What needs to happen? The one new rule mandated by the national association requiring every home to be professionally measured. Agents must report sqft by each level of the dwelling. The must describe all areas of the lower level and include pictures. Appraisers don’t have a chance without this information. They get blamed for so many problems that have nothing to do with their profession. The problems start with Realtors® and the MLS, yet no one is rushing to change the MLS and real estate industry. They keep focusing on appraisers, who have no unified national voice and are a much easier target to place blame and force changes. Sounds very much like politics.

For now, homes with basements or lower levels continue to be filled with errors. Mistakes large enough that change home values. Buyers (and lenders) beware!

 

 

Square Footage, the NAR, 6% Commissions, & the MLS Crisis

by Hamp Thomas on 04/16/14

The National Association of Realtors® started with a noble purpose; to gather and share real property data, and promote the quality of information being used in the growing real estate industry. The goal was clear; professionals sharing information, exclusively with their peers. Move forward half a century and six percent real estate commissions made sense; in 1950, 1960, and even until the mid 1990’s. But, as soon as the world of online records exploded, MLS systems and the way real estate brokers worked started to change. It quickly became a new world where bigger and faster meant better, and the MLS was becoming more of a marketing tool for the public rather than a data bank for MLS members. The internet brought an endless supply of bells and whistles and a worldwide audience, instantly. However, the MLS was never designed or intended to reach a world-wide audience. MLS was a “members only” organization.

For agents and brokers there was less time spent gathering information about each listing and measuring houses became less and less important. It was more about describing and highlighting homes to show the property to attract buyers. There was little to no thought about this information becoming a comparable sale at a later date, for use by their peers. A totally new function for the MLS just evolved. Then, liability crept in. With agency issues, there were new forms, rules, and lots of conversations. With the dreaded topic of square footage (which no one wanted to talk about), the system just evolved without any national guidance.

It seems hard to believe that the National Association of Realtors® has no national policy on square footage. There is no national system which requires all Realtors® to enter consistent property details. The real estate (and appraisal) experts cannot seem to agree on how to best measure a house and different methods are used all across the country. We have a real estate industry that prices 90% of their inventory using a price-per-square-foot formula, yet they don’t require brokers to provide accurate square footage details. The appraisal industry is required to use a specific square footage total on every comparable property and MLS is their main source of information. Yet many MLS systems don’t report any square footage details, some report the information their agents get from tax records, and some report a range of square footage, which leaves appraisers to rely on the notoriously inaccurate county tax records. While no agent is required to measure a house, as the real estate experts, many would argue that they should be responsible for making sure it gets done properly; and before they ever determine a listing price. If agents are going to use a price-per-square-foot formula to determine a listing price, then that number had better be accurate. If not, the value will be wrong. Over 90% of homeowners we polled assumed that measuring the square footage was part of their agent’s responsibilities, and they would be “shocked” to know that was not the case. Every market is different, but for 80-90% of the real estate sold in this country, when a broker prices a home it comes down to price-per-square-foot. Look at several CMA’s (or AVM’s) and you’ll quickly see this all powerful formula being used, and much too often, misused. Even the classes teaching agents how to properly create a Competitive Market Analysis (CMA) talk about using the price-per-square-foot formula. But, they do not speak about where this information comes from and why it is so important that it be accurate.

There are over 880 individually owned and operated MLS systems, each with their own requirements for reporting property details. The forms they use are locally dictated. Between tax records and MLS systems, there are over 100 different names for finished square footage. How can a national search of any kind be done properly with such a hodge-podge of different names for square footage? It can’t. All the national averages and percentages thrown out at consumers every month are often swayed by inaccurate information. They provide a national average of price-per-square-foot, yet if their square footage details are flawed; so are their statistics.

After studying square footage (in the MLS, tax records, AVM’s, & the appraisal industry) for most of the last decade, the errors are alarming. We hear so much talk about appraisal “quality” these days, when the information they use in the appraisal industry comes directly from the MLS and that’s where the “quality” problem begins. Quality in the appraisal industry will never significantly improve without changing the level of quality information contained in the MLS. The appraisal industry can only be as accurate as the information on which they depend and that comes from the MLS and Realtors®.

The tax department has zero responsibility to the real estate information system. They did not meet with the real estate industry and say, “here, let us provide you with the information you need, all for free.” But, the MLS still wants to get paid the same as they did when they accepted that responsibility for accurate property details? Something’s wrong with that picture. Tax records, which many people believe contain the “official record” for every home, does not need accurate square footage details for their purposes. They never enter any dwelling and any square footage details are more estimates than anything else. The errors are far worse in homes with upper levels and with basements. But, for them to do their job, that’s all they need. The tax system works exactly the way it was designed, the MLS does not.

This problem is growing and it appears no national leader wants to step up and take on this controversial subject. For over 100 years the square footage debate has been going on and still there is no single, nationally mandated, measurement standard. If consumer protection is truly a priority for the real estate industry, someone must accept the responsibility for bringing this subject into the spotlight, with one required measurement standard and one professional way to measure a house. Not only a required standard, but then a mandatory course teaching brokers the importance of this subject.

So, the online parade in MLS of bigger and shinier continues, while quality of the data continues to dwindle. This problem leaves inaccurate home pricing in BPO’s, CMA’s, AVM’s and in appraisals. This is really not that complicated. Until the real estate industry provides higher quality property details, the appraisal industry simply cannot improve. And, computerized appraisals are all smoke and mirrors, only serving to line the pockets of big banking. Real estate is a local, information business, and the original intent of the MLS was to provide localized, quality property information among peers. Todays, the MLS is mostly an advertising website.

We found about 10-15% of all agents that properly handled square footage details. Just ask any appraiser about square footage problems in the MLS and the overall quality of the MLS. Unless all Realtors® get back to basics, which is highly unlikely without a national requirement, perhaps their six percent fee needs to also be a thing of the past; just like the quality of information they report. Think that sounds a bit harsh? Unfortunately, it is a sad reality across much of the industry and, sometimes, the truth is hard to hear. In this case, the truth is that the appraisal industry continues to be reformed while the real estate industry remains under the lawmaker’s radar. Why seems a fair question… 

Are you getting the full value for your home? 
Got a Question about Square Footage, Public Records, MLS, or AVM's?

We'll try to help. 
The Real Estate Advisor