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Sylvia Crossland, Broker Steve Crossland, MPM (512) 301-5811 |
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When Your House Shrinks - A Case Study of Wrong Square Footage Size
June 24, 2006
One of the first things people ask when they are interested in a home is “What’s the square footage?” One of the first things we ask buyers, once we know their price range is “what size home do you need?”. With few exceptions, people are able to immediately quote a size range in square feet. Square footage measurements make it easy to compare and sort one house against another and to decide, when searching, which homes to select initially as candidate properties, and which to exclude.
Many agents and buyers use the square footage size of the home to compare the price per square foot against the average price per square foot of homes sold in the particular neighborhood or area in which the home is located. Agents and Buyers use the square footage in this manner because no other characteristic of a house is as easy to understand, or as generally reliable to compare. Of course square foot size it is not and should not be the ONLY criteria used in valuing a home. There are many other factors to consider. But in Austin TX it is simply a fact that square footage size is a primary and common measure of value comparison used by agents, buyers and sellers when evaluating and comparing homes of similar size, quality and location and trying to determine what a fair offer or list price will be for a home.
So what happens when it is discovered after the fact that the square footage size of a home is substantially smaller than the number represented by the Seller? This just happened to one of my Buyers, prior to closing, and the outcome was that the deal fell apart, the Buyer may lose his Earnest Money, and the home will have to be returned to the market with the square footage amount corrected. The issue is a bit more complex than it first seems, and it’s one of those cases in life where, in my opinion, common sense and fairness collide with established law.
The Story
I’m scanning new listings one morning and I see one in a hot part of area SW in South Austin that raises my eyebrow. A newer 2100+ sqft single story 3/2/2 with 2 living areas plus a study listed for less than $220K in a neighborhood where few homes sell for less than $250,000 anymore. I immediately go preview the property and it looks good. A CMA (Comparative Market Analysis) reveals the home to be under-priced, as compared to other homes in this neighborhood that are single-story between 1900 and 2300 square feet (I usually go about 10% above and below the square foot size of the subject property when looking for suitable comparable sales). I matched one of my buyers to this home and we made an offer, based on the value reflected in the CMA, which was well over the list price. The offer submitted by my buyer was selected in favor of 4 other offers received by the seller.
Upon what did the Buyer rely in thinking the home was 2100+ square feet in size?
The listing stated that the home was 2100+ sqft and the source of the number shown in the listing was an appraisal. The Tax Records showed this home to be just below 1800 square feet in size, but the home felt bigger because of the layout, and the Seller provided the actual measurements sketch from his previous appraisal to validate the size at 2100+ sqft.
As Realtors, we are taught if there is a discrepancy in the Tax Record size and an appraiser’s square footage measurements, to always trust the appraisal. This is because the appraiser is a licensed professional who actually visited the home and measured according to industry guidelines. The Tax District does not perform this sort of measurement and they often guess, or use builder’s floor plans, or rough exterior dimensions.
It is reasonable to assume that the appraiser will produce a more accurate square footage measurement that the Taxing District. Secondary to that is that fact that this particular home has all of the areas one would normally find in a home of 2000 square feet and larger - the second living area and the 4th bedroom/study, with a big family room and kitchen. So, upon walk-through, one would not necessarily think that the house ‘feels’ smaller than the stated square footage. I certainly didn’t and neither did the listing agent, who is also very experienced.
When the Buyer’s appraisal was completed, it showed a smaller size - 358 square feet smaller - than the Seller’s appraisal measurement. Appraisal measurements for homes almost always differ by some amount from the square footage listed in the Property Tax Records, but a 20% difference is unusual and substantial. It is not a trivial amount. Now we had to wonder which appraiser to believe? The buyer’s appraisal was only 8 feet different than the Tax Records, so we started thinking it was now very possible the home square footage size was overstated in the listing.
In looking at and comparing the property dimension sketches of both appraisals, I could see that the discrepancy could be assigned to the measurement of the depth of the house. One appraiser had it at 51 feet deep, the other at 45 feet deep. So I went and personally measured the depth of the home and it was indeed 45 feet. The buyer’s appraisal and the tax records have it right - the home is less than 1800 square feet in size. A subsequent third appraiser was hired to go measure the home and he also came within less than 8 feet of the Tax Record amount.
The square footage of the home had been unintentionally misrepresented and overstated by 358 square feet (20%) to all prospective buyers via the information represented in the MLS listing and the seller’s appraisal diagram of the home.
So what’s the big deal, it’s only a number, right?
This misrepresentation resulted in inflated CMA analysis by me and no doubt other agents in helping our buyers determine competitive offer prices. A new CMA using the correct square footage results in a much different value. It comes in at $3,000 below the list price, whereas my original CMA showed the value substantially above the list price.
Since this buyer is an investor, I also ran a new leasing market CMA and concluded that homes smaller than 1800 square feet in this neighborhood rent for about $200/mo less than homes that are, on average, 350 square feet larger. This changes the financial equation for the buyer. The home is not what it first appeared to be from a financial investment standpoint.
So now what?
The over-stating of square footage size was pointed out and documented to the Seller. The buyer at first offered to pay the original full list price and go ahead and close (which was just a week away), but felt that the current contract price had been obtained as a result of an unfair market advantage enjoyed by the seller, due to the fact that all offers were calculated using an overstated square footage.
Since my buyer knew that he was not willing to pay the contract price, it was in fact the case that the Seller obtained a higher contract price than he would have otherwise, had the correct square footage been listed from the start. Since the Seller did not respond by acknowledging the mistake and offering to work toward a fair outcome, but instead basically said “buy it or lose your earnest money”, my buyer decided to walk away from the deal.
Unlike the Seller, my Buyer would never have had the advantage of advertising and marketing this home as a 2100+ square foot home. 2000 square feet is a hard cut-off or a “bright line” for many buyers and renters. Whether we like it or not, even though this particular home has a good layout and feels bigger than it is, it will never appear in MLS leasing or sales search results for people who desire a home 2000 square feet or larger. It won’t even appear in searches for homes 1800 square feet or larger. This could affect its future market value and the ability of the home to appreciate relative to the contract price.
What value did the home appraise for, and does that matter?
The home appraised for the full contract price, and yes it does matter. The legal wisdom in this situation says that the measurements don’t mean a thing if the home appraises for the contract price. As long as the home appraises for the contract price, the buyer has no argument and everything I have said above with regard to CMA’a, square footage preferences of buyers and renters, etc., means nothing. The argument is basically that the home itself has not changed. It’s still the same home, with the same rooms and walk-around space regardless of the measurements. The seller isn’t selling square footage; he is selling the home the argument goes.
I was told this by Texas Association of Realtors Attorney at the TAR legal hotline, with whom I discussed the matter two days ago. He says it is entirely the Buyer’s obligation to verify square footage, period. Case law mostly agrees. Unless there was intentional foul play, all of the consequences of this error fall on the Buyer, simply because the error was revealed after the Option Period expired, and because the home appraised for full value. If the buyer fails to close, he is in breach of the contract, according to real estate lawyers, and the seller could pursue remedies if he should so choose, including refusing to sign off on a return of the Earnest Money.
Attorneys Have it Wrong
If I may be so arrogant, the attorneys have it wrong. I would agree with the attorneys if we were talking about a 50 or 100 square foot difference of 5% or even 10% of total size, but this is a 358 square foot mistake that amounts to more than 20% of the size of the home. That, in my mind, is a substantial and material misrepresentation of size and it puts the matter into a different class of discrepancy.
Additional, I would argue that placing the tuning point upon the appraisal alone ignores that fact that the appraisal is itself influenced by the contract price, and therefore it can arguably be said that the appraisal was influenced by the incorrect square footage that created inflated CMAs that produced the market frenzy that resulted in multiple offers and thus the contract price.
Appraisers will deny that the contract price itself influences their final number, and I don’t believe it. If final appraisal amount is not influenced by the contract price, then why do most appraisals just happen to land on the exact contract price? Appraisers always request to see the actual contract and they cannot say that the number is not looked at. It is mathematically and statistically impossible that such a high percentage of appraisals would equal the exact sales price without the sales price influencing the appraiser’s final assessment.
In order for the “well, it appraised for that value” argument to hold water, the appraiser would have to be able to honestly say that his appraisal would have been exactly the same dollar number even if the contract sales price had been lower. Given that we hardly ever see an appraisal for more than the contract price (for reasons I won’t go into), I find it highly doubtful that any appraiser would have appraised this particular home for the exact value of my buyer’s offer, had that offer not existed.
So, absent the high offer made by my Buyer, the appraisal amount that legally traps my Buyer in the deal would not exist. Since that high offer existed based largely on incorrect market data generate by the Seller’s unintentional misrepresentation of the square footage size, it invalidates the argument that the appraisal amount binds the Buyer to the deal. If you’re an appraiser or lawyer and want to debate this with me, have at it. I’m willing to listen and learn, but common sense and math are not on your side.
So what is the home really worth?
The irony of this is that the home may very be worth what my buyer was willing to pay, but probably not. I won’t know until I see what the house eventually sells for, but I’m betting it will be for less than my buyer offered.
But because of something we call “gap pricing”, a home like this one can often sell for more than a Realtor’s CMA would suggest. This is because once a neighborhood starts seeing a gap in pricing between the smallest homes and the larger ones, the smaller ones benefit from the fact that buyers who want to “buy in” to a particular neighborhood will make concessions on home size just to get into the neighborhood, its schools, amenities, etc.
So, when only 2 or 3 homes are on the market for below $250K in a highly desirable neighborhood with an average sales price of $300,000, we can often see the lowest priced homes get bid up.
But if that happens with this home after it returns to the market, it will sell to a fully informed buyer who intended to purchase a home less than 1800 square feet in size, and who made his offer knowing full well exactly how much higher he is willing to go over the sales comps for a home of that size in that neighborhood. And the Seller would know that the offer he receives is made by a fully informed buyer who knows the correct size of the home he is purchasing and who has looked at market analysis prepared using the correct square footage.
So what would have been the fair thing to do?
If I were the seller in this situation, I would have accepted the buyer’s offer to reduce the sales price to the original full list price, which was $3,000 higher than the market analysis suggested for this home. If I didn’t want to do that because I thought the home, even with the correct square footage listed, would sell for more than list price anyway, and that I could get that from a new buyer, I would have acknowledged that an honest mistake was made and let the buyer out of the deal. I would not have said to the buyer essentially “screw you, you have to pay me the full price you offered even though we all now know that that offer was made as a result of a misrepresentation of square footage by me.”. It wouldn’t matter to me that an attorney says I can try to hold the buyer to the original price. I would want to do the right thing.
What would you have done if you were the seller or the buyer in this situation? If the buyer had gone ahead and felt pressured to close at the original contract price, would we be able to say this was a win-win deal and would we be able to say that all parties were treated fairly?
Comments
27 Responses to “When Your House Shrinks - A Case Study of Wrong Square Footage Size”
Interesting. Just goes to show you how wrothless appraisals are. It’s the same CMA but includes factors that have nothing to do with market conditions (rebuilding cost, etc.) Appraisers should come up with a number not knowing the contract price, otherwise it’s the same as dry-labbing.
We did eventually get the Seller to sign off on the earnest money return to the Buyer on this deal.
Is this in Travis Country or in Circle C? These are the two areas where medium homes are 300,000 and up.
What if the seller had purchased the house thinking that it was 2100 sqft and he came to know of this discrepency only now?
If a buyer discovered the wrong square footage later, it would be too bad according to most attorneys.
We are moving to Texas, and I can’t help but suspect that this is a common problem. I was previously a realtor, and many houses seem smaller than their sqare footages suggest. I found this webpage because I was wondering if the square footage includes part of the garage or patio, like they do in Miami, Florida. Yes, I’m working with a realtor.
Square footage in most places only includes the heated and cooled areas of a home. That’s the way it is in Texas.
So if a buyer purchases a home having been appraised at a certain square feet and then finds out the home is quite a bit smaller when he goes to sell due to another appraisal, there is nothing they can do? Can they not sue the appraiser?
Hi Laura,
They can sue the appraiser, but would have to prove financial harm. In this case, the buyer bought a house (he thought) bigger than what was listed and what the tax records reported. He didn’t offer to pay more when this happened as far as I know. It would be hard to turn around and sue the original appraiser unless the actual appraised value turned out to be overstated for the correct size of the home.
Steve
Texas is a state that goes to great lengths to protect Buyers. It is unfortunate that Buyers are not automatically given a free and clear option to a full refund of their deposit and any additional expenses incurred (i.e., inspections, appraisals, surveys, etc.) when Builders (or other Sellers) misrepresent square footage. Truly, any informed Buyer with a licensed agent will be examining comps for price per square foot averages before making a contract offer. Yes, despite the variations in amenities in each comp, we do eventually look at price per square foot! Even when the price is further negotiated, perhaps even in the Sellers favor, the Buyer should still be considering comparable property pricing to make certain they are not overpaying for a home.
That said, when the square footage is not correctly stated or purposefully misrepresented (and some rooms are difficult to measure so let’s say, off by more than 40 square feet), a Buyer has not gotten a fair shake. So, my advice would be to write into the contract that if the square footage stated in the MLS is not supported by a new appraisal, and the parties have confirmed the appraiser’s new measurements to be correct, a Buyer should be able to renegotiate a contract to their satisfaction when the house does not have the advertised square footage OR have the option to walk away free and clear with refund and any expenses in hand. Certainly a seller will probably not like to see this written into the contract but consumers must protect themselves. And if the seller is hesitant to sign a contract with this stipulation at least the Buyer will then be aware that the Seller may not be that certain of the stated square footage before the Buyer is faced with this reality a week before closing!
Hi Jane,
Your “Opt Out” idea sounds reasonable, but as a Seller I’d want it to go both ways. I’d tell the Buyer “ok, if it turns out bigger than what I thought, you’ll pay me more”.
Has to be a two way street. We just had another of these by the way. House was smaller, but when we redid the comps based on the smaller square footage, the price held.
Steve
Hi Steve, was the footage including the exterior wall? That could be 100 sq ft difference.
I’m involved in a similar case in Virginia. The square footage was overstated by 228 sq. ft. (17%) based on a prior appraisal given us by the Seller. The buyer refused to close and a mutual release was signed. The house did appraise for the sales price, and was resold immediately. Now, 18 months after the fact, the buyer is seeking reimbursement for his appraisal fee and inspection fee, claiming misrepresentation, and has made a complaint to the Virginia Real Estate Board.
We just purchased a home that went one step further. We bought the house not knowing the agent had inflated the size of the home by including unfinished attic space and unfinished garage space (a side room) to the tune of 483 SF. Yes I said unfinished. It is attic space with no windows, no insulation, no heat/cool, nada.
Due to a fast close, and the fact our broker forgot the appraisal for the signing (so I never saw it), we signed (big mistake) and then 3 days later rec’d the appraisal showing the wrongdoing-we are officially duped.
The agent and agents priciple broker stand behind their practice of adding unfinished attic space and garage space-unreal-and hide for cover under the disclaimer at the bottom of the RMLS listing. Even my agent flipped sides with her freind-the broker telling us to be happy, we still got a good deal, the house appraisal came out ok, so what if you got 483 SF less than you bargained for, be happy and move into your new home (that we helped you get ripped off with).
SInce the agent is the one who did this, and did not mention the SF adders in the description, I feel it is fraudulent activity so we are looking into a lawsuit against the listing agent.
Even the way the SF was calculated is amazingly wrong, she admits to taking a previous appraisal, which sketched but did not include SF data for, and used the sketch to scale the lines on the sketch to determine the attic SF. That admission alone should be grounds for her to lose her license if nothing else.
We have filed a complaint with the state of Oregon already but that will only confirm or deny the wrongdoing of the agent, and possibly result in suspension or loss of license. To be compensated, I will have to sue them in court.
I welcome any coments.
Hi Scott,
Unfortunately, unless the Brokers involved value the avoidance of legal wrangles, you’re probably going to experience what I describe in the article. Thus far, the courts and lawyers have held that you are not purchasing a specific number of square feet but that you are purchasing a house. The size of the house you walked through and saw hasn’t changed.
I don’t agree with the legal viewpoint on this. I think a good lawyer could prove with evidence and testimony that buyers do in fact purchase based on valuation that rely on square footage.
Steve
Steve
I know and thus far you are right but think of this analogy. SInce real estate agents and used car salesman are mostly vermin of the same nature, it is fitting.
You buy a used car for $20000 with 40000 miles on it. Like a home and the home square footage, you buy the car you like and try to get low miles too. These are the two main factors assuming it runs well and is in good shape and so on.
After you drive it off the lot, and you take it in for the first oil change, the attendant puts in the VIN number for your new vehicle but it’s already in there under the previous owner, and guess what, the mileage is now lower than it was before. The last oil change shows 50000 miles, previous owner.
At this point you know you’ve been cheated and guess what? the law would go after the previous owner and the salesman to determine who turned the mileage back and one of them goes to jail.
Why is the home sale with incorrect SF listed any different? You bought the car and liked it before, so what if it actually has a few more miles on it, its still the same car. You should have known the mileage was probably off or asked the owner for the maintenence records right?
I don’t know why the law seems to be protecting this fraudulent practice for real esate agents. Fraud is fraud. The guilty should pay. I believe we have a clear case of fraud.
We have an attorney looking into our case right now to see if we can prove fraud has ocurred. If they can, we will probably go for it but only if they believe very strongly that fraud can be proven, not just neglegence.
I’ll try to keep you posted.
Hi Scott,
Like I said, I’m on your side. Keep us posted on what your attorney is able to determine.
Steve
I am in a very similar situation right now in the Houston area. We are locked into a contract and have found out, by the appraisal, that the house is actually around 400 square feet smaller than on the tax records. The seller did not have an appraisal when it was purchased one year ago, and claims not to have known that the house was smaller. We are two and a half weeks from closing, and with the house being appraised for lower than the sales price by a few thousand, the seller does not want to lower the price now.
Hi Steve,
My wife and I liked the floor plan and location of a home located in Joshua Texas. We noticed the home did not feel as large as the MLS listing stated, the home totaled approximately 800 sq feet smaller than the listing (based on the room dimensions given in the MLS listing). Our realtor was granted access to measure the home confirming our number (2364 listed in the MLS, 1560 actual measurement) We submitted an offer based on comps and the actual sq footage of the home and were immediatley scolded by the listing agent who stands by the 2364 sq foot figure even though she admits to having no idea how to calculate sq footage. We were told if we were to pay for an appraisal she would adjust the asking price accordingly. In my opinion, this is borderline criminal if not outright illegal as a 30% discrepancy is not just accidental. How can I be sure she will deal with me and not another party since I’m no doubt a thorn in her side. Also, since this is clearly a case were the discrepancy was identified up front, and an offer was made based on the actual size of the home (it was rejected of course), is there any legal recourse available to deal with the obvious fraud.
Steve,
An owner has no obligation to accept an offer, regardless of the rationale of the prospective buyer. If the seller doesn’t want to listen to your sqft information and consider your offer, he doesn’t have to.
The issue of how the sqft is represented by the listing agent is different. If the agents knows (or should have known) that a there exists in the advertising of the home a material misrepresentation of fact, and is ignoring that, the agent could be in violation of the Realor Code of Ethics Article 2 which states “REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction.”
I would schedule an appointment with the Broker of the listing agent. I’d be non-confrontational and explain that you like the house and wish to buy it, but not based on an inflated list price which results from an incorrect sqft.
If that doesn’t work out and you believe that the Brokerage is continuing to misrepresent the size of the home, you can let the Broker know that you will consider filing an ethics complaint with the Board of Realtors or TREC. None of that, however, can force a seller to accept your offer so you might also consider just moving on.
Steve
Steve why shouldn’t the real estate agent like yourself be required to understand how to measure a home. As mentioned above its not very difficult. Why should a home owner have to wait for an appraisal. Shouldn’t I expect if I has a homeowner ask a real estate agent to list my home shouldn’t they take the 30 minutes or so to measure the home. I don’t think thats asking to much of someone thats going to be paid thousands of dollars. You appear to understand the basics of measuring a home why don’t you take the time to measure the home, please don’t say thats not my job. I see above were everyone wants to sue everyone. If I am going to pay thousands of dollars to a real estate agent why shouldn’t they take thirty minutes to measure my house.
Hi Paul,
> Steve why shouldn’t the real estate agent like yourself be required to understand how to measure a home…please don’t say that’s not my job.
Well, it’s actually not as easy as you think, for starters. Many homes have complicated layouts or two stories. Realtors are not trained to measure homes. Second, it really isn’t our job and we’d be written up for violation of the code of ethics for operating outside our scope of expertise.
I understand what you’re saying, but it’s more complicated than spending 30 minutes measuring a home. Each measure will, even by the same person, will yield a slightly different number.
Also, interior measurements are used in some instances whereas exterior “corner to corner” measurements are used in others. Do you subtract interior wall widths or include them? What about dead space under the stairs or areas under low sloped upstairs spaces? There are far too many variables.
Steve
Update
We have filed with the state board against the sellers agent. The state has since decided to launch an investigation based on seeing the evidence. I will keep you posted.
Despite my insistance that we will not pursue unless we have a near “slam dunk” win, and the fact that the attorney and his company have a tradition of representing real estate professionals against such lawsuits, Our attorney is advising that we go ahead with a lawsuit against the parties involved including seller, sellers agent, buyers agent, and possibly the mortgage broker for the buyer since their was probably collusion between the two withholding information from the buyer(me).
The attorneys feel this is a clear case of deliberate fraud and misrep. because the sellers, and sellers agent included but did not disclose the additions of both unfinished garage square footage, and unfinished, uninsulated, undocumented attic space.
I will keep you posted on the progress.
Thanks Scott. Will be interested to hear how things turn out.
Steve
Sounds like the shoe fit and the buyer liked it. That is the danger of buying a car by the wheel….they all have four but some have more room than others.
I’m in the process of selling my house due to a company transfer. Part of the relocation package is that my company will buy my house if I’m unable to sell it. While I realize the relo company will complete extensive appraisals, I’m concerned because a house in my neighborhood that recently sold (it’s the exact same house i have minus the 350 sq ft room over the garage) has the incorrect square footage indicated. In fact, the house was on the market for 20 months. For the first 18 months, the original Realtor listed the sq ft at 2100 (which is correct), however, the second Realtor listed the sq ft at 2500. While I suspect the new owner isn’t concerned, what can I do to ensure my house isn’t negatively affected when it’s appraised due to an inaccurate market comp?
Mark,
I would focus on your house and its attributes. It’s your agents job to point out incorrect imformation contained in sales comparables to any buyer agent who might try to use the other sale to justify a lower price on yours, or to an appraiser.
If you’re talking about the County appraiser, and property tax implications, wait and see what your appraised value is and make a decision at that time.
Steve