A few years ago, I published a blog post after discovering another reason why online estimates for homes for sale (and off-market) can be way off. After discussing this topic with several clients recently, I decided to turn it into another mini-blogging series.
To recap, reason #1 is that refinances were treated as sales. I don't know if that is still the case but it was certainly an issue then. Refinances are often far below the appraised value. The refinance amount does not equal a possible sales amount. This was - or maybe still is - such a huge flaw that contributed to false estimates, or guesstimates as I call them.
Reason #2 why online home estimates can be inaccurate
Let's talk square footage, shall we?!
The way we enter listing information into our regional multiple listing service (BRIGHT MLS) is not how it is displayed in (some) online Real Estate portals. I'm not going to name names, but we all know who they are (I hope). These portals are listing aggregation websites that pull data from two main sources, the MLS and public records.
The square footage in the MLS is generally the same as in the public records. But, we do have the ability to change it from "assessor" to "estimated" when an addition increases the footprint of the house, for example.
We also differentiate between GLA (gross living area) and below-grade square footage which can further be divided into finished and unfinished square footage.
The online Real Estate portals, however, do not (all) differentiate. They'll just lump the finished square footage together - regardless if above or below grade. That's misleading as they are treated differently when pricing homes, and, most importantly, when it comes to the appraisal.
The GLA does not include finished basement space. While value is given for it in any appraisal (or value is deducted for unfinished space) it is far less than the GLA.
So, if you have a house with 2,000 sq ft GLA and 500 sq ft finished below grade then some Real Estate websites will display it as 2,500 square feet.
A recently sold home with 1,500 sq ft GLA and 1,000 sq ft of finished space below-grade will also be shown as having 2,500 square feet.
But, the two are not the same. House #1 is more valuable (in general, all other things set aside).
As a matter of fact, house #2 may not even be considered as a comparable by an appraiser because the GLA should generally fall within a comparable range (approx. +/- 20%).
You see how displaying only the finished square footage without taking into consideration how much of it is above or below grade can not only be misleading but also result in false online estimates of value?
To complicate things further, a house may have a finished space above grade - an enclosed porch for example - that appears to be part of the GLA having been nicely finished. However, if it does not have a permanent heat source (a plug-in electric wall heater is not it) it won't count towards the GLA.
In addition, there are - unfortunately - a few agents who will also manipulate the data by adding below-grade square footage to the GLA. It won't work. The appraiser is required to take their measurements and they will make adjustments accordingly. Worst case scenario, you'll end up with an appraisal (well) below the contract price.
Any consumer, whether buying, selling, or just keeping an eye on the values in their neighborhood would be wise to consult a seasoned REALTOR®, or appraiser if they want to know what a house is truly worth, and not rely on listing data aggregation websites.
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