Square Footage; Perception vs Reality

by Mike Armentrout

In a recent article that made the rounds on social media, a story was reported that should not be surprising to any appraiser.  A homeowner was seeking legal damages against the realtor who listed her home for the 2007 purchase. Pam Whelan contended "Had I been presented with the more accurate square footage, I could have made a more educated guess on whether or not I wanted to proceed in purchasing the home."  The concluding assumption was that she could not sell the home for as much currently.

We can discuss obvious questions about the listing sources and if an appraisal was done but this reveals something I have had concerns about for a long time.  Can buyers actually perceive how big a home is in real numbers simply from an inspection?  For that matter, can realtors or appraisers even perceive this?  Notice I used the term perceive and not calculate.

I would like to conduct a hypothetical semi-scientific study that consists of 50 typical buyers, 50 local realtors and 50 local appraisers.  Let's take them through 10 randomly selected properties that vary in age, size, style, design, locale and features.  No access to MLS or county data will be made available. At the end of a walk-through inspection, everyone will write down an estimated square footage for each property.  Do we believe the results will be in a close range?  If we can agree that buyers cannot determine accurate size estimates from walking through a property, it is safe to assume they are relying heavily on what is reported in marketing materials, MLS, county data and even appraisals.  This is why clearly defining how size is to be estimated is so critical.

Appraisers will naturally start talking about accepted practices, Fannie Mae guideline XI, 405.05 and American National Standards Institute (ANSI) standard Z765 but even appraisers may fluctuate a bit from one another.  When taking measurements, one may round to the nearest half foot while another may calculate down to the inch.  Some will look at sloped ceiling attics differently and others may include finished and heated 4 season rooms.  The bottom line is that there will inevitably be some degree of variance in reported size estimates.

Where this square footage issue gets dicey for us as appraisers is weighing and analyzing its impact on the market.  Are buyers making offers based on perception or realty?  In a contributing article I wrote a few years ago, I expressed concern over what I consider the over-use of cost per square foot formulas to price properties.  Our realtor friends may be emphasizing a factor that is already built into buyer reactions to things like bed and bath counts, floor plan layout or a myriad of other features that are encompassed by square footage.

I'm not saying that square footage doesn't matter.  Market data will typically indicate that it does.  I am simply asking how big of a factor is it once we select truly comparable properties and make appropriate adjustments?  Is the current Collateral Underwriter (CU)  trend of higher "per square foot" estimates in line with this understanding?  Most property features are tangible like location, view, condition, quality, age, style, room counts, lower level finish, etc, but buyers routinely assume size based on what is reported.  In a market environment that seems to view size as the holy grail of property features, it seems as though a case could be made against over-relying on size both in marketing and as an appraisal consideration.