D. Hampton "Hamp" Thomas's Blog

Genie Back in the Bottle - The Appraisal Industry

Thu, 01 Apr 2010 20:12:04 -0700

Genie Back in the Bottle - The Appraisal Industry

Is it already too late to put the "genie" back in the bottle? Like much of the real estate industry, "it depends" is part of any answer. First, let's look at how the magic lamp was opened and the genie was released; and the possible impact on the future

of the real estate and mortgage industries. In the last year the appraisal industry has been turned upside down and inside out. Veteran appraisers across the country have been forced into other professions. Many have also been asked to work for half their fee. Imagine going in to work tomorrow and finding out your pay has just been cut in half. And, to add insult to injury, they want you to work under whatever schedule they decide on. You worked for ten years setting your own schedule and controlling your own business, and now you are no longer your own boss. You have no options and no one ever asked your opinion about this new business plan. Today you work for yourself and tomorrow you work for a company who knows nothing about your business. They don't need to understand appraising to run an AMC. Somebody flipped the switch and a new industry emerged; an industry now in charge of the real estate valuation process. An unregulated new industry with an enormous power. If you look back at the events of the last year, this could have never happened to any other industry. Try telling the bar association and attorneys they will now work for half fees and on someone else's schedule. It's hard to believe it really happened, but it is a reality of this new real estate market.

The national real estate market collapsed. Whenever there is a problem of this magnitude, someone has to take the blame. Changes must be made. In the recent real estate crisis, the appraisal industry was selected as the most likely candidate for changes and regardless of what happens in the next year, many experienced, highly educated, dedicated and well qualified appraisers have been lost forever. No way to turn back the clock. A politician (who knew nothing about the appraisal business) decided to take out the magic lamp and used the all powerful genie to change one industry and create another in its place.

Let's look at the collapse of the real estate market and the specific reason so many homeowners walked away (some willingly and some angry at the system) from their loans and their homes. The current powers that be are set in their efforts to control the appraisal industry and see this one division of the housing industry as the "problem" that needs to be fixed. The total real estate problem was overwhelming and changes had to be made; big changes. And they were, quickly. Perhaps a little too quickly, before they had time to really examine the big picture. However, one state started the appraisal revolution. They started the ball rolling and this movement has been building, with many different points of view, until it may turn into a new appraisal revolution. Eventually, consumers will pay for the price of change.

Picking one division of an industry to single out, in hopes it will solve all of real estate's problems, is where this started to go wrong. Completely re-inventing one department or segment of the home buying process is NOT going to solve the problem. Appraisers certainly were not the sole cause of this current crisis. But, they have turned out to be one of the many victims of this real estate meltdown. Let's talk just a little about real estate values - how they escalated - and what finally led to the bubble bursting. There's no way around this answer, even though it may be unpopular among some groups. However, let's look at some of the facts.

Real estate prices are in direct correlation with the availability of mortgage funds. The more people that have access to home loans, the more buyers, and the better chance the seller has of getting a higher price. It's nothing more than the law of supply and demand. Let's face it; over a three year period (during the real estate boom), money was easy to get. 100% loans, no doc loans, low doc loans, stated income loans, first time buyer programs over 100%, variable or adjustable rate mortgages which often offered an unrealistic payment for a short initial term - they would worry about tomorrow - tomorrow; loans and the name of some of the loan programs was a creative wonder to watch. Lenders and mortgage brokers flourished across the country. There was money to lend and everyone in the real estate industry was making money. For a few years, life was good. Money was flowing, homes were selling, prices rising, and it appeared there was no end in sight; just part of the American dream. But unlike the fairy tales and happily ever after, eventually "tomorrow" had to come.

Have you heard of "The Golden Rule?" He who has the gold makes the rules! There's no gentle way to say this, but the fact is, the greed of lenders is the source of the problem and always has been. They are the ones with the money to lend. The ones with the money, making the rules. They are the ones that established the lending guidelines that had to be followed by everyone else in the lending chain. They are the ones who wanted to keep the "loan pipeline" full and flowing. When they ran out of borrowers with the traditional twenty percent down payment, they reduced the requirements to encourage borrowers with only ten percent down to get loans. Got to keep that pipeline full! When they ran out of borrowers with the ten percent down, they once again reduced the lending and credit requirements to encourage borrowers with five percent down, then three percent, zero down, then "low doc" and "no doc loans."

Think about the meeting where that came up with these genius ideas. "Hey, let's loan money to everybody! It doesn't really matter if they can afford the home. If we can make it easy for them to qualify for a loan, we are going to get paid. There's no way we can lose. We make a profit on loan fees up front, the interest rate on our adjustable rate mortgages can only go one way, up; and we sell most of our loans anyway at a profit in the secondary market. Let them worry about if the people can actually keep up with the mortgage payments. We've made our money and moved on. What about the increased risk? Well, the lenders just pack the loans up and sell them off to someone else in a mortgage backed security that is so far removed from the valuation process no one can figure out the value any more...not even the most sophisticated investors. At that time, nobody really thought to ask the appraiser's opinions. The appraiser was just a step in the process. The local lender wasn't worried about the true value of the property. All they know is that they need this appraisal to come in at the right price so they can close this loan and get paid. Anything beyond that is not their problem.

Just think about that executive who said "let's give loans to people who don't look so good on paper, but they can come up with three percent down and pay the loan fees. Let's create a "low doc, stated income," and "no doc" loans. We'll let the applicants write down whatever they want on the loan application and if they sign it, we've got no liability. Borrower can walk in and say they make $60,000 a year, but over half is in cash and we'll smile and say no problem, we've got a loan for you." It's not very logical, but it turned out to be very profitable; at least for a little while. You have to admit those executives were right. Profits soared and anyone that wanted a loan, got a loan. Easy credit put many people in homes they really could not afford. And, instead of saving more money and getting a traditional mortgage, they sank whatever money they had in a loan (or in fixing up the house) which left them house poor. In the end, they lost it all. Now they have to start all over. Many American dreams have been shattered during this boom and bust time.

It was inevitable there was going to be a problem. People were getting loans they could not afford, and getting them easily. There was no concern for the true financial outlook for consumers and every lender was pushing loans through just as fast as they could. It was easy money gone crazy. Many people in the appraisal industry were screaming to slow down this craze. The end was in sight long before the bottom fell out. So even as many appraisers saw the inevitable outcome and tried their best to reverse it, they are now suffering the consequences for the market gone bad. Guess they didn't scream loud enough??

Most of the real estate industry's problems stem from financial motivation. Getting paid is a strong motivator. There have been some fraud cases involving appraisers. They made big news. How many stories have you seen written about the lenders that pushed the appraiser to get that value so they could continue to feed their family? Any stories about lender fraud. You hear about a few fraud cases, but more about the lending industry getting tax bailout money and paying out executive bonuses. After all, they came up with some great ideas so they deserve these bonuses, right? Remember that appraisers can't work alone. They have to be motivated by a lender.

There was never any question of if this was going to happen, just a question of when. And then, what would be done to correct it. Who gets to decide the future? The lending industry created this monster and is interesting being left out of the solution. Now we are arguing over AMC's and the HVCC and everybody thinks they have the best idea to fix the appraisal industry. Industry leaders have been saying for months that, no matter what the fate of the HVCC, the shotgun marriage between appraisers and AMC's is sealed forever. If appraisers want to do business now, they have to do business with AMC's, and on the terms dictated by these "middlemen" and the newcomers to the industry.

According to the Working RE/OREP Appraiser Talkback Survey, with over 4,500 appraisers responding, 92% of appraisers are not in favor of the HVCC. 82% no not consider AMC's to be a legitimate business model. 53% report they experience pressure for value from AMCs (what they are supposed to eliminate), and over 55% say that they are asked to re-examine reports with the intention of trying to "make the deal work." Even under the new system meant to fix the old, within the first six months of existence, they are experiencing the same issues they were designed to eliminate. It makes it look like most lenders really don't want the appraiser to provide a true opinion of value, they just want the deal to work so they can get paid. Um, sound familiar?

Most appraisers support evidence that appraisal quality has diminished since the HVCC started. Many AMC's look for the lowest bidfder who returns the report the fastest. Most surveys indicate that low fees and quick turnaround times are hurting the quality of the appraisal. Quality is not the main focus. "Quality" in their eyes (remembering they are untrained in appraisal and no nothing about the real estate industry, and especially local markets) quality is deemed only by the percentage of adjustments on the report. As long as the comps are within a short distance from the subject property and there are no "red flags" on the report, they loive it. In a market with perfect comparables, the system works great. The problem is that in America, perfect comparables exist in about 10% of the total market. Leaving 90% of appraisers who may be considered as providing low quality work when they are trying to protect the investor. Appraisers try to do what they were hired to do, provide an unbiased opinion of value. Until the lending industry decides what they want from appraisers, this problem will not go away. Appraisers solve valuation problems. The problem is with what the lenders are asking the appraiser to do. Do you want to know the property value or do you just want to make the deal work. The old saying "the buck stops here" needs to be directed towards the lending industry. Until the system that orders and pays for appraisal changes, the industry cannot change. The only way to fix this problem is to start where the problem begins. Like too many things, it comes down to making deals work and getting paid. It's all about the money.

Follow the Money

There are too many stories like the one below.

Getting Out: Why I'm Leaving Residential Appraisal

By appraiser Mike Read.

I used to love appraising. Long before there was any appraiser regulation, my clients came to me for valuation opinions because of my years of experience in real estate and their recognition of my accurate and reliable reports. Then came the HVCC. Now my clients of 24 years are not allowed to contact me. They have to order appraisals through a third party appraisal management company (AMC) which takes up to 60 percent of my fee for their trouble.

I have signed up with about a half dozen AMCs. One went out of business owing me over $7,000. Three asked for all my exhibits (resume, license, E&O policy, application forms, etc.) and I've never heard from them again. One expected me to complete a URAR full appraisal report for $90. My most recent AMC has not sent me an assignment in months due to their lack of volume.

I recently testified before my state legislature in support of a bill to regulate AMCs. My first suggestion was to support the repeal HVCC at the federal level. Secondly to ensure that a certified appraiser is on staff at the AMC to do review work, and third to require the AMC to have a surety bond of $500,000 to $1 million so payment to appraisers is assured if the AMC defaults. Others recommended that AMCs become regulated by the State Appraiser Licensing Board.

I have 24 years of appraising experience, am licensed in two states as a General Certified Real Estate Appraiser, have been HUD approved for the whole 24 years, without any complaints and have completed hundreds of hours of special education. What good has that done for me now?

What is driving this patchwork quilt of ineffective appraiser regulation? Have you heard of "The Golden Rule?" He who has the gold makes the rules! The greed of lenders is the source of the problem and always has been. They are the ones with the money to lend. They are the ones that establish the lending guidelines that have to be followed by everyone else in the lending chain. They are the ones with the "pipeline" to keep full and flowing. When they run out of borrowers with 20 percent down they reduce the requirements to encourage borrowers with 10 percent down. Keep that pipeline full. When they run out of borrowers with 10 percent down they reduce the requirements again to encourage borrowers with five percent down, then zero down, then "no doc loans." Keep that pipeline full.

What about the increased risk? Well, they just pack the loans up and sell them off to someone else in a mortgage backed security that is so far removed from the valuation process no one can figure out the value any more...not even the sophisticated investors. (Nobody thought to ask the appraisers!)

Now it's time for me to say goodbye to my clients and friends in the residential real estate and financial service fields. You've heard of the theory of "trickle down" economics? Well here is how my exit from the business will trickle down to you all.

Dear MLS provider, I will be canceling my subscription for data services at the end of my current period ($150/Q).

Dear title company, I will be canceling my subscription for data services at the end of my current period ($85/mo).

Dear software company, I will not be renewing my annual software maintenance agreement at the end of my current period ($799/yr).

Dear Board of Realtors, I will not be renewing my annual dues this year ($525/yr).

Dear Appraisal Institute, I will not be renewing my annual dues this year ($395/yr).

Dear E&O insurance company, I will not be renewing my policy at the renewal ($700/yr).

Dear state of Washington, I will not be renewing my appraiser license at the end of the biennium ($500).

Dear state of Oregon, I will not be renewing my appraiser license at the end of the biennium ($500).

Dear education provider, I will not be needing any more CE credits so will not need any more expensive classes ($500/yr).

All together (apx. $6,000 a year).

Dear AMCs, goodbye.

Dear Consumer, you are the only one I feel sorry for. I will no longer be in a position to provide you with an independent valuation for your largest lifetime investment. Your lender does not want you to know who I am, how to contact me, how much I charge, what value opinion I reach. They just want you to pay for some conforming paperwork. If they receive any bad news they just shoot the messenger.

Real Estate Instructor teaches students about the Appraisal Measurement Standard?

Sat, 04 Apr 2009 11:15:24 -0700

I attended a mandatory (NC) real estate "Update" class last week. One of the two classes we are required to attend annually to keep our real estate license active. The classes are four hours and are generally the kind of classes where you have to fight to stay awake. This year's class included a page and a half specifically dedicated to the topic of "square footage." When I heard those words, my ears perked up.

I listened as the instructor discussed the responsibilities of the listing agent. The update manual states that "the Commission does not require any agent to report the square footage of a structure. However, if a licensee chooses (or is compelled) to disclose the square footage, it must be accurate." The instructor told us that most agents report square footage because it is a required field in most MLS systems, not because of any state requirement. The manual also states "the fact that advertising mediums now allow licensees to express square footage as a range, does NOT obviate the need to accurately determine the square footage." The manual is very specific that square footage taken from "public records" is not a reliable source of information. (In many areas, up to 14% of all MLS listings reflect the exact same square footage reported in the county assessor's records. And, if you check "Zillow" or "Trulia" or one of the many other real estate valuation services, they all have one common denominator; they show the exact same square footage listed in the local tax department records. Any formula, regardless of the complexity, is dependant on this number being accurate.)

The part of the class that really caught my attention was when the teacher told us about the three different measurement guidelines.

We discussed that there could be three different square footage totals reported on any dwelling, and that all of them would be considered accurate. The first guideline that might be used was the one published by the North Carolina Real Estate Commission. The second guideline discussed was the one published by "ANSI." The third guideline discussed was the one used by most appraisers and published by the North Carolina Appraisal Board.

What's wrong with that picture? The Appraisal Board does NOT publish or mandate any measurement guideline. Even though I already knew the answer, I checked with the Appraisal Board and they do not offer any such guideline.

The perception is that appraisers have a separate measurement standard from everyone else. This particular instructor has worked with the real estate Commission for many years and is an excellent teacher. However, even he did not know that appraisers don't have a mandatory square footage guideline, and he is teaching a mandatory update course telling every licensed real estate agent about the appraiser's guideline.

Maybe it's different in North Carolina, but in many places he is exactly right about the three different measurement methods. There is one method agent's use, one method most appraisers use, and then the "ANSI" method. All three different. That was the purpose of the "American Measurement Standard" - to provide a written guideline for that third measurement method.

An experienced real estate instructor is teaching agents about the square footage guideline (he says) is published by the North Carolina Appraisal Board, which is non-existent. I think it's safe to say there is confusion over the topic of square footage.

Real Estate, a numbers game

Wed, 11 Mar 2009 19:57:04 -0700

Numbers can be a funny thing sometimes. It can often be one of those "it depends" situations. It literally depends on the purpose, presentation, creation, interpretation, formulation of percentages, and a host of other variables, which can easily be manipulated by anyone with a little mathematical prowess. Study the numbers below. We could all have figured this out with enough time, right? Creating a current real estate value is an art, not a science. Size does matter. Don't create a suggested list price without first measuring (or having it measured) the property. Protect your client and yourself.

1 x 9 + 2 = 11

12 x 9 + 3 = 111

123 x 9 + 4 = 1111

1234 x 9 + 5 = 11111

12345 x 9 + 6 = 111111

123456 x 9 + 7 = 1111111

1234567 x 9 + 8 = 11111111

12345678 x 9 + 9 = 111111111

123456789 x 9 + 10 = 1111111111

9 x 9 + 7 = 88

98 x 9 + 6 = 888

987 x 9 + 5 = 8888

9876 x 9 + 4 = 88888

98765 x 9 + 3 = 888888

987654 x 9 + 2 = 8888888

9876543 x 9 + 1 = 88888888

98765432 x 9 + 0 = 888888888

1 x 1 = 1

11 x 11 = 121

111 x 111 = 12321

1111 x 1111 = 1234321

11111 x 11111 = 123454321

111111 x 111111 = 12345654321

1111111 x 1111111 = 1234567654321

11111111 x 11111111 = 123456787654321

111111111 x 111111111 = 12345678987654321

Beware Builder's Square Footage!!

Thu, 26 Feb 2009 19:27:31 -0800

Real estate is, and always will be, a people business. Money is a powerful motivator and one person's idea of ethics may not always agree with the next. Such can be the case with MLS reporting; sometimes. It's up to each of us to help monitor such activity and maintain the credibility of our information.

When you become involved in new construction and creating new developments, you quickly learn how appraisals work and the importance of the phrase, price per square foot. You have to know what other homes in the area sold for and how the next house will "comp" out. Builders understand a house has to be sold twice; once to the buyer, and then again to the lender/appraiser/underwriter. Anyone who has been in the business for long understands how this process works. Unfortunately, they sometimes learn how to help size work to their advantage.

One new construction dwelling was listed in MLS with 2,148 square feet. Working on the appraisal, I calculated the house at 2,512 square feet. After two more trips and another person's help, the same result. This was good news for the buyer and they were getting much more house for their money. I assumed it was just a mistake and informed the builder. I never thought much more about it until it showed up in MLS as a "closed" sale. The sale was reported "closed" with 2,148 square feet. The builder was well aware of the correct square footage, and I brought it to his attention again after the house was reported closed. The MLS was never changed. Now, every time this dwelling shows up for use as a comparable sale with a sales price of $324,900 and 2,148 sq ft, that calculates to $151.26 per sq ft. If the square footage was reported correctly it would show $324,900, 2,512 square feet and would calculate to $129.34 per square foot.

In that case, "size" was used to help other dwellings appraise at a higher price. The price went up on the next few spec houses and the builder pointed to this comparable sale at over $150.00 per square foot. It's hard to argue with the "proof" of value as reported in MLS. Our MLS records carry a great deal of power. Whether reported mistakenly or otherwise, a closed sale affects the value of all the sales that follow. Information is power and money, and is often controlled by the agents who report square footage to MLS. As professional agents and appraisers, we must watch for and report such activity!

Texas Appeals Court - Size Does Matter!

Wed, 26 Nov 2008 12:07:36 -0800

Appraisers and agents should be partners in a real estate transaction. They both have a duty to protect the best interests of their clients and no one likes it when a house appraises less than the sales price. It creates more time and less money for everyone involved. I've always viewed appraisers and Realtors® as real estate professionals. Sometimes, the "grass is greener" theory gets in the way. Just for the record, I am an appraiser and a Realtor®.

I recently posted an article on AppraisalScoop.com. It's a great website with lots of information and should be a favorite for all appraisers. My article was titled "Who's Measuring America" and discussed the growing use of public records. I have also recently finished the "American Measurement Standard," which I hope can offer an alternative to "ANSI." There seems to be a great deal of debate over the measurement of stairs and the "AMS" gives the industry a second, formal measurement standard. (Mention you read this on Active Rain and receive a free PDF copy of the "AMS.")

The article received an overwhelming response. The majority of appraisers obviously believe that Realtors® will never measure houses again, leaving MLS records filled with information obtained from public records. These square footage totals are created in a mass appraisal process and were never intended to be used outside the tax assessor's office. What they provide is an "estimate of size" and the property assessor never enters the dwelling. Until the internet explosion and the discovery of public records, Realtors® measured homes and the "MLS" provided the most credible SOURCE of real estate information. Now that source is leaning towards the county tax department. Every value and comparison, which is based on the square footage taken from public records, is at risk of providing an erroneous conclusion. Appraisers see this problem daily and don't believe most agents care, or want to find an answer; "you just as well reinvent the wheel" was my favorite.

Many appraisers also obviously don't understand anything about agents and commissions. There were comments like "for a 6% commission you would think they would have time to measure the house." I received several similar e-mails and the general feeling was that agents were getting paid lots of money and should definitely be required to measure houses. Well, anyone who has ever worked in a real estate office should get a laugh from the 6% comment. They know that 6% can shrink to 1% in a hurry, and then you get to pay your expenses. It is funny how people in the same business, don't know anything about each other. We need to publish a book giving the full job description of agents and appraisers. The "green grass" may change colors when you know all the facts.

Should Realtors® measure houses? My first answer is absolutely yes. However, not yet. Until the industry leaders can provide a nationally approved standard of measurement, creating a specific square footage number offers an element of risk. A Texas appeals court recently upheld the principle that "size matters" in a case where the square footage of the sold home was less than advertised. The buyers sued (and won) against the real estate professional who listed the property. The house turned out to be 253 square feet smaller than advertised in MLS. The Austin court of appeals upheld the decision that the real estate professional had a duty to get the information right and that buyers shouldn't have to pull out a tape measure to find out the size.

What this case shows us is that the listing agent is responsible for any reported square footage. Mistakes in square footage can be costly. Knowing the liability of reporting this number, and the fact that there is no nationally approved and mandated "standard" of measurement, measuring and creating this number is becoming less appealing all the time. Public records are fast, free (and most important), free from liability, right? At least free from liability on the county's part. If a licensed professional reports the square footage provided in public records, and that number turns out to be 300-400 square feet off the mark, guess what. Exactly right, bring your checkbook to court.

Realtors® have measured houses from the conception of the organization. Real estate professionals must continue to CREATE and PROVIDE accurate and reliable real estate information; information which includes the size of the dwelling. However, in order to properly offer this important service, there simply has to be a nationally recognized measurement standard associated with the Realtor® organization. Perhaps they could offer two choices of methodology (stating that each provides acceptable square footage totals) since agreeing on one system has not been accomplished in over 100 years. However the powers that be decide to handle this subject, it must be handled through the national association and seen as a positive step towards promoting the public's interest. Public trust is at an all-time low, while the use of public records is at an all-time high. Realtors® need to measure houses. To do that, they need some nationally backed system to apply. They also need a disclosure statement (which all parties can sign prior to closing) allowing everyone involved in the transaction the opportunity to get another opinion of size prior to closing. A disclosure form which says something similar to "this is how I calculated the square footage," but you are welcome to have your agent or other professional measure the dwelling and confirm the size. (just a suggestion, not legal opinion) Perhaps then, Realtors® can start to measure houses again.

The appraisers also discussed how Realtors® don't know how to measure houses and don't want to measure if they do. How are they supposed to know how to measure a house when nobody has taught them? No pre or post licensing classes prepare you to measure a house. The broker-in-charge has a full plate and doesn't have time to teach the art of measurement. So, with no-one to teach them properly, no standard or detailed instruction manual to study, and no disclosure form to sign (to protect themselves and their clients), how or why should agents measure houses? Possible problems if you do; or if you don't.

By the way, the appraisal industry also does NOT have one, nationally approved and mandated standard of measurement. If they are the ultimate real estate experts, and they can't agree on how to measure a house, why would they think Realtors® should do what they can't? It is a unique situation. But, it is one we can fix.

Please take a look at the "American Measurement Standard;" take a look at the "ANSI" standard; please take a second look at the subject of square footage. McKissock.com is coming out with a new on-line class on measuring houses titled "Size Matters-Residential Square Footage." There is also a new book titled "Size Matters-Residential Square Footage-Agent's and Appraiser's Edition" scheduled to come out the first of December. This book looks closely at public records, AVM's MLS, RESPA, and just about everything you can imagine about measuring a single-family dwelling. Join the discussion.

MLS - Can We Make it Better?

Fri, 20 Jun 2008 11:33:42 -0700

Realtors® and responsibilities will always create debate. I consider a listing agent responsible for all the information provided to "MLS" about that property. The "MLS" system is only as reliable as the information created and communicated by the listing agent; one property at a time. Real estate is a unique business. We all depend on our direct competition to provide the information which we use to base our opinions. A "listing" is a great responsibility and many decisions (listing prices, offer prices, mortgage amounts, insurance rates, etc.) are all based on this information. We advertise things like "price it right; how to price your property," and "how to set a price for your home." We work hard to sell the public on the idea that we have the information and the expertise to determine the value of their single largest life-time investment. Our expertise is often affected by our knowledge of details; details provided by the information available in MLS and provided by our competition. Every agent who prepares a listing presentation or creates a "CMA" automatically assumes the information reported in MLS is accurate. This powerful database has a great deal of influence on the national real estate and mortgage markets, and also on our national economy. This information is now, as it should be, being provided by the people most qualified to report it; Realtors®. Can we make it better? Absolutely, and the NAR is hard at work making improvements to our communication systems right now.

There is one area where we could make our "MLS" much more effective. Let's talk about what many consider a four-letter word; size. Square footage is the foundation which all other information surrounds. There are two main ingredients in the valuation process - location/land value and size. Without these two items, the rest of the data is unable to provide a meaningful comparison. On the most widely used appraisal form approved for federally regulated transactions, the only automatic adjustment on the entire form is based on two numbers; the sales price and the square footage. A specific square footage number is required on every subject and comparable property. A range or "guestimate" of GLA can alter a value conclusion by a significant amount. Size matters more than most people ever imagine.

Size Matters - Real Estate 101

Fri, 13 Jun 2008 12:03:40 -0700

It has been said that the three most important factors in a home buying decision are location, location, location. While location is, and always will be, a key ingredient of value; size or "square footage" is also one of the most important factors in the home buying decision. Does the home have enough space to meet a specific buyer's needs, rooms, room sizes, layout, and offer sufficient living space for their intended use? It also provides a comparison; although not always accurate, it does offer an estimate to establish a logical value based on comparison with other similar properties. The total finished floor area of a house is one of the most important things a potential buyer needs to know.

Ask a typical buyer to make a list of the five most important considerations in buying a home. Chances are, square footage or size will be on that list. It's one of those things that get passed from one generation to the next and people tend to follow tradition. In order for people not to think they need to know the size of a property, they will have to be taught that it doesn't make a difference. The "price per square foot," is a phrase and a concept, embedded in our thought process and will always be a significant factor in determining value.

The mortgage industry depends on the integrity and quality of the appraisal industry; the appraisal industry depends on the quality of information provided through the MLS; and the MLS database is completely reliant on the quality and the level of detailed information provided by the listing agent of each property transaction. The information chain that provides the foundation of our home valuation process is controlled by the input of data through this one private information system. The MLS has a great deal of power and the communication of square footage information is critical to the stability of our mortgage market, which is greatly affected by this one, seeming simple piece of information. The proper measurement, calculation, and communication of this basic component of real estate, is mandatory for a proper value determination and proper comparability. Size matters in every case. With the price per square foot of property these days, don't rely on public records. Insist on having a professional measure your property. Trust your most valuable asset to a licensed professional.