When Your House Shrinks – A Case Study of Wrong Square Footage Size
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.
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?