Appraising

How Many Times Would You Like to Pay for That Basement?

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Are you in the market to buy a home? A lot of people are. The summer months are usually when the real estate market really heats up. With the ongoing shortage of home inventory, realtors are working hard to make their listings more attractive than their competition. Attempting to do so, some are including the finished basement square footage in their gross living area estimates in their MLS listings. This is not a new trick! It should be noted that not all realtors use this tactic. But many do. I see this on a regular basis as an appraiser. This can be  misleading to buyers. How so?

IT CAN’T BE BOTH
When real estate agents include the finished basement square footage in their gross living area (GLA), they usually also indicate in their listing that the property has a basement. What they are falsely indicating is that the property has ‘X’ amount of square feet of GLA (They include the finished basement in this sq. ft.) in addition to having a basement. That is what we call double dipping. Double dipping is not cool on any level! The finished basement area cannot be both a basement and gross living area. For example, if an appraiser is appraising a bi-level dwelling, for non-lender work, and they include the partially below grade finished area in their GLA, they have to say that the property has no basement. Or, they can value the partially below grade finished area as a finished basement. But, then they could not include this area in their GLA.

 

It should be noted that both Fannie Mae and FHA guidelines state that any portion of a home that is even partially below grade cannot be included in the GLA. Even if there is a walk-out entrance. Most home owners and even some real estate agents are not aware of this.

CONSEQUENCES 
When real estate professionals include the finished basement square footage in the GLA, it waters down the price per square foot. That hurts the listing. This is one of many reasons why trying to use the price per square foot to estimate the market value of a property is dangerous. Appraiser Ryan Lundquist, of the Sacramento Appraisal Blog wrote a great article on this subject entitled ‘Explaining How Price Per Sq. Ft. Doesn’t Work’. I would encourage you to read it!
Another consequence is that it skews data in the MLS which makes the reports that other realtors and appraisers rely on less accurate. Garbage in, garbage out.
Including the basement square footage in the GLA also leads to inaccurate list pricing. Many times, when the market value is less than the contract price, this is a big factor that contributes to the situation. Often times, the list price in these cases is determined with the false premise that the home is larger than it is. An appraiser will physically measure the home and based the appraisal on their more accurate GLA measurements.

Here’s a sobering thought. What if you qualify for a PIW (Property Inspection Waiver) and you decide not to have the appraisal completed? You could be paying for two basements! So, if you qualify for a PIW, it would be wise to still have an appraisal completed. Or at a minimum, hire an appraiser to measure the home and let you know what the real gross living area is. You’ll be glad you did! It would also be wise for real estate agents to hire an appraiser to measure the home they are going to list. The way the legal landscape is developing due to, from here on out, the real estate agent might be at risk of being sued if they are basing their listing price on a square footage that is inaccurate. I would encourage you to listen to the pod case “The Great Transformation with Peter Christensen!!!” with the Voice of Appraisal with Phil CrawfordI have provided the link below.

When it comes to reporting the GLA inaccurately, there’s really no upside.
In the end it just wastes everybody’s time and, even worse, can lead to consumers paying more than market value and real estate agents being sued for misrepresentation! Buyers beware!

Thank you for reading my article! If you enjoyed it, please subscribe to our blog. It is free and I will not add you to any advertisement lists. Next week I will have my first ever market update. I hope you will stay tuned!

Over the next couple of months, in addition to publishing new articles, I will be updating and posting some of my older articles, like this one, on my this new site.


Here are some other blogs and podcasts that I recently enjoyed. I hope that you will also!

Flopping The Housing Market – Housing Notes by Jonathan Miller

9 Home Measurement FAQ’s For Agents – Birmingham Appraisal Blog

The Art of Appraising – Advantage Appraisals

Do Not Remove Tag! – DW Slater Company

America’s Housing Crisis Is A Ticking Time Bomb – Huffpost

The Great Transformation with Peter Christensen!!! – Voice of Appraisal with Phil Crawford

 

 

 

10 thoughts on “How Many Times Would You Like to Pay for That Basement?”

  1. Oh, how I wish agents in the Atlanta Metro area would listen to this article/post. So many times I have to fight this argument with the owners, the sellers or even the agents because of how the agent reports the information on the listing.

    1. Thanks so much! It is a source of frustration out there. There’s a lot of conflicting thoughts. Hopefully the article will help a bit.

  2. that is not exactly 100% accurate, in New York City, there are many homes, like hi-ranches in which that “basement” is fully above grade, finished and rented! Or brownstones that basement (garden level) are partially below, and, as per guidelines, if it is common and there is a market acceptance, than yes, that :”basement” can be included in the gla. In fact in 2-4 families they want “GBA” which is all areas, although i do not include “true” basements in gba and make a good explanation. I even had a big argument with a Chase underwriter that insisted in a 2-4 family that the basement area be included on the grid as part of the gba. I had to do it, and sure enough, later they asked me to correct it back. You HAVE to know your market when it comes to the basement

    1. Thanks for me mentioning that. There are unique situations in which the guidelines I mentioned may be a bit different, to your point. Nice point also about gross building area vs gross living area. I should have clarified that. Yes GBA does include the basement areas. I was really only addressing residential homes. I will say that based upon Fannie Mae’s most recent Selling Guide, I don’t know if they will accept including the partially below grade areas in the GLA, even it it is viewed as such by the general market. If the appraiser is consistent in the way the GLA is calculated for the subject and comps, the results should be supportable.

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