How do appraisers come up with square footage adjustments?

Have you ever wondered how appraisers come up with square footage adjustments? Why is the adjustment sometimes so low? Is it just a guess or is there some sort of methodology? Let’s take a quick look at four options for determining how much extra square footage is really worth.

4 options for making adjustments for square footage:

  1. Image purchased at 123rf dot com and used with permission - 14688774_s - smallerMake up a Number: Not a good method. Any adjustment in an appraisal report is supposed to be based on the market instead of a guess.
  2. Use one standard figure: Sometimes appraisers are known to use one cost adjustment figure for every single neighborhood. This is bad since some neighborhoods will pay far more for extra space. For instance, a lower-end neighborhood in the Sacramento area could easily see adjustments around $30 per sq ft for extra square footage, but a higher-end area might see adjustments beyond $100 per sq ft. Also, when the market is hot, the price gap between small and large homes tends to squeeze together a bit more, but when the market is declining, values tend to spread further apart.
  3. Use cost figures: Cost plays a role in determining adjustments to a certain extent, but keep in mind appraisers are really looking at what the market is willing to pay for something rather than what it costs. For instance, an addition might cost $50,000, but that doesn’t necessarily mean the addition would actually add $50,000 in value. How much would a buyer pay for the extra space? That’s the question the appraiser has to answer by finding similar properties in the neighborhood or market area. What if the owner overbuilt for the neighborhood? Or what if the owner added a $50,000 Yoda-shaped room? Stars Wars fans might love it, but others would probably run. The same is true for a built-in pool. It might easily cost $35,000, but buyers are simply not willing to pay for the entire cost of the pool in the resale market. Can you see why cost might not necessarily translate into value?
  4. Analyze sales in the neighborhood: This is the best method. Compare houses in a neighborhood to determine the adjustment. Or in other words, find matched paired sales to discover what buyers are willing to pay for a certain feature. For instance, if you find a house that sold at $230,000 at 1700 sq ft, but a very similar house sold at $220,000 at 1500 sq ft, that tells us the market paid an extra $10,000 for 200 extra square feet. In this case the adjustment for square footage would be $50 per sq ft since $10,000 divided by 200 equals $50 per sq ft. This is just one example though. It’s important to find several other matched pairs so you can make a reasonable judgement about what the market is willing to pay for extra square footage. See the example below. Can you see how the adjustment for square footage is a reflection of what the market is willing to pay?

What does the market say the extra square footage is worth?

square footage example in appraisal report - by sacramento appraiser blog

Keys to Remember:

  1. Similar Size: Compare similar-sized properties to the one you are trying to value. The market might look at larger and smaller properties differently, so if you want the proper adjustment, you’ve got to stick with comparing apples to apples so to speak.
  2. Condition: Remember to consider upgrades and condition in your analysis. An upgraded property might sell for substantially more than a fixer. This is why properties in the most similar condition will be your best comparisons when trying to extract a reasonable adjustment for square footage.
  3. Know the Market: Sometimes smaller homes can sell for more than larger homes. It’s easy to assume a larger home will sell for more, but at times certain smaller models may carry a value premium for whatever reason, which causes them to sell for more. This is where knowing the neighborhood market comes in handy.
  4. Data Sample: Use more than just one comparison to substantiate how much extra square footage is worth. More data helps build a stronger case.

When I get asked how much appraisers adjust for square footage, I think my answer sometimes disappoints real estate agents and home owners. It would be nice to share a very concrete number, but saying, “It depends on the neighborhood and the market” is really the best answer. Most of all, real estate is about location, so it makes sense that the numbers can be different depending on the location, right?

Questions: Any insight to add or questions to ask? Or do you have any stories to share? Comments are welcome below.

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Comments

  1. says

    Always great information Ryan! I’ve been in real estate for 21 years and have performed BPOs for our REO clients for 18 of them. I always take away something helpful from your blog posts and appreciate you taking the time to share your insight.

    Scott

  2. says

    I totally have had the same experiencing as you Ryan when agents ask about price per square foot. I sometimes feel like I am letting them down but it does really depend on the neighborhood. One thing I have learned is that there is no rule of thumb in appraising, including price per square foot adjustments.

    • says

      It’s good to hear we have the same experience, Tom. Sometimes I hear responses back in offices that say, “Well, it’s all subjective then. Appraisals are only an opinion….” But it really shouldn’t surprise us that adjustments differ greatly from area to area. After all, real estate is all about location, and there is a profound difference between the ghetto and high end of the market. It would be nice of course if everything was neat and tied up in a perfect package, but that’s just not how it works.

  3. Carolyn Williams says

    How do you get the your figures if it is a custom built home with not similar comps available within the immediate neighborhood? There are a lot of dissimilarities due to custom built homes.

    • says

      Hi Carolyn. That is a great question. Custom homes are best compared to other custom homes. There will obviously not be a perfect comparison, but there can still be competitive properties that buyers would consider equal despite many differences. Appraisers can make adjustments for square footage at some point, but they also have to really consider what the other features are worth such as wine cellars, movie theatres, pool houses and whatnot. Once those features are accounted for based on market research and knowledge, there may be a better indication as to how much of an adjustment should be given for extra square footage. Why are there not similar homes available in the immediate neighborhood? Is this custom property in a tract neighborhood? Or are there simply no recent sales? There is so much to think through as an appraiser depending on the answers to these questions.

  4. DeeDee Riley says

    Great information Ryan! I try and let my clients know this all the time. Though I don’t know exactly how you get a value, I let them know that the square footage difference isn’t calculated at the same price per square foot the home sold for. Thanks for sharing your explanation!

    • says

      Thanks so much DeeDee. Good for you to communicate well with your clients. It’s not always easy for a seller to understand the difference between cost and value. For instance, it might cost $30,000+ to install a pool, but the market might only pay $10,000 for it. That can be a financial painful realization. The same holds true for square footage. It’s all about what buyers are willing to pay for the extra space rather than what it would cost to actually build the extra space.

  5. Georgia says

    Interesting find. Have non conforming property appraisal came in low based on sales over 6 months old, $30 sf bldg, $ .25 sf land, $13k pool adjust. Viewed another appraiser’s report of very similar house who used $40 sf, $1sf, pool $10k, in same town. Court case, need better appraisal which BPO ‘s would list $100k over appraisal. Asking top rated appraiser in area for appraisal review. Is this the best to do at this point?

    • says

      Hi Georgia. Thanks for sharing your story. It’s so hard to be able to give you specific advice since I am not acquainted with your situation, though it does sound like a good idea to talk to a very experienced appraiser. If the appraiser really knows the market and the property type, hopefully that will result in a credible value. A BPO is only as good as the agent doing the BPO. Hopefully the appraiser can give you some insight into whether the BPO is even reasonable or not. A BPO can suggest any old price, but that does not mean it will actually sell at that amount. I wish you the best!

  6. luke says

    I have researched this question on several appraisal forums, and it seems the general feedback I get from all of the appraisers is “it depends” which doesn’t really seem helpful in determining a model for square foot adjustments, or for being able to create a standard by which an appraisal from one appraiser would come out statistically similar to another appraiser (which is really what should be happening in a model approach).

    While the total value of a property is determined by a number of factors (which is why there are so many areas for adjustment on an appraisal form), the single line item of living square footage should have some sort of equation for which it is adjusted, and that equation should be based on some model. I think that is what most people are asking when they ask “how do appraisers come up with square footage adjustments?”

    Your approach number 4 for what to consider makes a lot of sense, as other adjustments for features, condition and amenities can be accounted for on their respective line items. I only wish more appraisers used this approach. In my area, they seem to be all over the board in the number they use to come up with square footage adjustments.

    • says

      Hi Luke. Thank you for reaching out. It would be nice if there was a model or equation to apply, but real estate is so different from neighborhood to neighborhood – even in the same city. We desire models to help us extract values from markets, but there is no template or formula we can impose on a neighborhood to give us accurate results. It might work in one neighborhood but not work at all in a different neighborhood (does that sound like some of the online valuation sites?). In one neighborhood we might see square footage differences make only a minor impact on the value (say $5,000), but in a nearby well established neighborhood the same amount of square footage could be worth $30,000 or more. This is why a formula wouldn’t work because it wouldn’t give us the right results in every neighborhood or in every market either. I wrote about this a bit more here in case it’s relevant: http://sacramentoappraisalblog.com/2014/09/23/why-a-little-black-book-of-value-doesnt-exist-in-real-estate/

      I agree that it would be nice to see more consistency among appraisers, though there is always room for some differences, and we can expect that. But point taken for sure. The big key here is #4. We simply have to put in the work to figure out what the square footage adjustment needs to be from neighborhood to neighborhood. If an appraiser or agent always uses the same figure, that’s sort of like imposing a formula on the house or neighborhood. That same adjustment might not make sense for the neighborhood at hand.

      Great discussion and points. Thanks again Luke.

      • luke says

        I think I was a little unclear in my point. A proper model for approaching the square foot adjustment for real estate would apply to the neighborhood in question. It wouldn’t extrapolate the results into another neighborhood. You would have to apply the same model to the new neighborhood. For a crude example, one would find 3 similar properties that sold, find the average price and square footage difference, and come up with an average $/SqFt adjustment. That “model” could be taken to a different neighborhood and applied to the new neighborhood. If the new neighborhood had sufficient properties that were similar to one another in other respects, you apply the same equation:
        (selling price/square feet of house 1) +
        (selling price/square feet of house 2) +
        (selling price/square feet of house 3)
        _____________________________
        3

        • says

          I like the idea, Luke. It’s just difficult to actually get this to work. The tricky part in all of this is to try to isolate the extra square footage to find out what that feature alone is worth. I’m pretty sure that’s what you’re talking about, which is great. But for onlookers, let’s consider this example:

          Imagine a 1200 sq ft house sells at $205,000. If we divided $205,000 by 1200, we would get a price per sq ft of roughly $170. Now if we see a house that is 200 sq ft smaller, we might be tempted to multiply $170 by 200 to determine what that square footage is worth. In this case $170 x 200 equals $34,000. Yet there has been a glaring mistake made here. The $170 figure actually represents the entire property (land, all improvements, upgrades, beds/bath count, layout, landscaping, sewer connection, etc…) instead of just the extra square footage. What is the actual square footage worth? The best way to tell would be to find another house with a similar condition, similar level of upgrades, similar lot size, generally similar size hopefully, etc…. and then see what the price difference is. Assuming all else is similar, we might find a house that was 200 sq ft smaller that sold at $195,000. So how much is the extra 200 sq ft worth in the resale market? It’s worth $10,000 based on subtracting $195,000 from $205,000 (or $50 per sq ft since $10,000 divided by 200 equals 50). I bring this example up because it’s really easy to do this in real estate, but when we end up applying a price per sq ft metric for one facet of value when the price per sq ft metric really encompasses the entire property, we can get off-base and/or inflated figures at times. Again, it sounds like you are not talking about this, so I’m not trying to combat what you are saying at all. I wanted to bring it up for the sake of anyone looking on and maybe wanting to join the conversation.

          When you figure out your model, let me know. I’d love to see if you can find something that works. I appreciate your attention to detail and your desire to see more uniformity in the appraisal process. Let’s be real too that sometimes appraisers are simply using the same adjustment in every single neighborhood, and they shouldn’t be. On a related noted, I know Assessors weight square footage and lot size and other factors into their valuation model. It’s a very interesting methodology to say the least.

  7. luke says

    Obviously, it would need to be checked to see if the adjustment was in scope with the neighborhood and comps, but it is a good general rule of thumb for this one factor in the appraisal.

  8. says

    Regarding technique #4, there are some tools available in the market that can help with this, and you’re significantly helped by having access to a full market’s worth of data from your MLS and public records.

    I’m the author of such a tool, called GandySoft PAIRS, and it will allow you to analyze your market to find these adjustment values using a holistic approach based on matched pairs analysis. It’s worth trying some of the tools available, as well as learning the fundamentals of how the tools operate. This can open up a whole new world of adjustment possibilities and give you credible support for your adjustments.

    For an example of the power of the tools, check out how we get adjustment results in a rural/custom market (pretty much the hard stuff): https://www.youtube.com/watch?v=gpGMR40QLeE

    You can try GandySoft PAIRS at http://gandysoft.com for free.

  9. Aleksandr Maslov says

    Good afternoon, Ryan! Very pleased with your articles. I have been evaluated in Russia since 1999. We have a slightly different format. We compare offers (afertu) unlike you. We is missing information on the real deal. Tax evasion is a national Problem. I wanted to understand. When assessing a residential house with land, you are excluded from the total value of the real estate value of the land as a nezatstroennogo? Example: The cost of the house and the land on Kotormo it is $ 150 = 000. Calculate the value of the land as undeveloped = $ 100 000. Thus, the replacement cost of the building, taking into account accumulated depreciation = $ 50 000. The area of ??a dwelling house = 100 sq.m. Then the cost of 1 sq.m. residential building will be $ 500. This amount is subject to adjustment and the value of sales by the pair cleared of land counterparts. And what do you do in this case?
    With great respect to you, Alexander Maslov.

    • says

      Hi Aleksandr. Thanks for reaching out. It sounds like you are describing The Cost Approach. In this approach we would consider the value of the land, cost of the building, value of any improvements on the site other than just the building, and any depreciation present too. It’s hard to say if I would come up with a different number than you in your situation, but it does sound like we have some similarities. I don’t think I can comment about your situation since I’m not in tune with the property. Best wishes.

  10. Brian says

    While your example above is ideal, I appraise in markets which are not quite that ideal. In the rural areas one will seldom find comparables that are even within 10 miles of the subject property. Further complicating the assignment will be that an appraiser will seldom find 3 or more comparables that are truly comparable in terms of age, gross living area, condition or site size. Unless the subject is new construction I place very little credibility in the Cost Approach, your estimate of depreciation could be significantly more than my estimate, it is an estimate after all. In an ideal world the appraiser should be able to support their adjustments but after 18 years in the business I have yet to find anyone show me 2 identical homes let alone hundreds and we as appraisers would need hundreds if not thousands of identical matched pairs to support these adjustments. Even if your market does have identical matched pair sales can you eliminate the fact that the seller of one of these properties was not more motivated to sell than the other seller or that the buyer may have over paid for the property because they had always wanted to live in that house? Adjustments are very subjective, I would much rather put a + or a – in the grid based upon the data that was available to me and give an opinion of market value or better yet a value range.

    • says

      Thank you Brian. I think a + or – would be fantastic also, and that can certainly happen for private appraisals for divorce and such. On a related note, I actually like the “0” in UAD where appraisers can include a “0” to basically say there is a difference between the subject and the comp, but there is no value reaction. I agree with you that at the end of the day there are rarely perfect comparisons. But there are still comparisons, and because buyers make comparisons and assign value to certain things, we have to do the same because we are supposed to reflect the market in our adjustments. I would guess in your case lenders sometimes might want precise adjustments for every little difference, but that simply is not something you can do (and I doubt buyers would do that either). Thus your comps might be 10-20 miles away and maybe not have many adjustments at times despite some significant differences (probably especially with lot size, house size, and outbuildings). I’m curious, what is the furthest comp you have ever used in your rural area?

      By the way, for any onlookers, I wrote a post more recently on adjustments in case anyone is interested. I think it takes some of this post to the next level to talk about not making certain adjustments that are often normative in real estate and the appraisal world: http://sacramentoappraisalblog.com/2015/11/03/being-a-trigger-happy-real-estate-adjustment-giver/

  11. Anne says

    The problem with no standard is it’s amazing how much variance personal opinion does play into these equations. We bought our home two years ago, and have done some upgrades including adding heated/cooled square footage and then had it reappraised to decide how much more we should be willing to put into our home. My disappointment is in the fact that the appraiser made note on the appraisal that the increase in our value from our purchase price comes from an improved market as well as upgrades, but for comparables he only adjusted at $50 per square foot, where as two years ago when we bought the appraiser adjusted at $75 a square foot. There are many similar sized homes in our area, but none have sold recently so he used homes that were all 1000-1500 square foot smaller. The plain fact is we either overpaid two years ago based on a poorly done appraisal then, or are home is being undervalued now. As noted the market has improved,the house has improved, so having a decrease in adjust/ square foot was highly disappointing.

    • says

      Hi Anne. Thanks for reaching out. I’m sorry to hear about your situation. Adjustments in your case can make a huge difference if the square footage size of comps are all 1000 to 1500 sq ft smaller. Are those really “comps” though? I guess we have to wonder if there are any similar-sized sales in the market? Maybe there are some older sales that help show what value has been like for larger-sized homes. Did the appraiser use any sales that were similar in size? That would be ideal because then an adjustment for square footage wouldn’t even be needed. The best case scenario for appraisers is to use properties that are so similar that adjustments are not needed. Otherwise it can make a huge difference if an appraisers uses say 50 or 75. I hope your situation improves.

  12. says

    Hi Ryan. Thank you. I have a better understanding. But how do you account for the 5000 adjustments on the comps? How was the amount calculated based on the example given?

    It’s driving me crazy!

    • says

      Hi Ruth. I really appreciate the comment. Thanks for asking. Here’s how I came up with it. Let’s assume all else is the same between the subject property and these two sales besides the square footage. Comp 1 sold for $230,000 and is 200 sq ft bigger than Comp 2 which sold for $220,000. We see a price difference between these otherwise similar sales and we see the market was willing to pay $10,000 for the extra 200 sq ft.

      We can think of it like this, $10,000 divided by 200 extra sq ft = $50 per sq ft. In other words, it looks like the market was willing to pay about $50 per sq ft for the extra size. It may have cost way more than that to build, but the market was only willing to pay $50 per sq ft. In some neighborhoods the market might be willing to pay much more and in other neighborhoods maybe it’s less. Or sometimes we start looking at properties and there really isn’t a price difference in the market for minor square footage, so it would be best to make no adjustment.

      Therefore when we look at the subject being 1600 sq ft, we are trying to adjust any comps (if they need to be adjusted) to account for any market reaction. In other words, if the market is willing to pay something for it, it’s probably reasonable to give an adjustment. In this case it looks like the market was willing to pay $50 per sq ft based on our research above, and the difference in square footage between Comp 1 (1700 sq ft) and the subject (1600 sq ft) is 100 sq ft. Thus we multiplied the difference in square footage by $50 to get $5000. In other words, 100 x $50 = $5000. We see a 100 sq ft difference with Comp 2 also since Comp 2 has 1500 sq ft and the subject has 1600 sq ft.

      Does that make sense? Please be honest and let me know. If not I would like to figure out another way to explain myself so it does. Thanks.

  13. Kelly says

    Hi Ryan, I’m just getting started and this is a great explanation, thank you. It did raise another question for me. When using matched paired, I’ve heard appraisers saying they keep a notebook of good matched pairs for reference on a future assignments. What would you say is a good time-frame for the use of these “good match paired” properties; i.e. when are they too old?

    Again, your blog is teaching me a lot, thanks!

    • says

      Hi Kelly. Thanks so much for reaching out. I imagine some appraisers keep files, though right or wrong I don’t unless it’s for something interesting like an accessory dwelling, suicide in a house, etc…. The difficult thing about keeping a file is that an adjustment in one neighborhood really might not be a good at all in a different location or even in a different market. Moreover, an adjustment for square footage for a smaller-sized home might not be the same as for a much larger home too in the same neighborhood. Or imagine adjusting for the difference in value between 1 and 2 bathrooms. We wouldn’t necessarily take that adjustment and apply it to the difference between 5 and 6 bathrooms (because that difference might not matter much at all). That’s why I don’t see too much value in spending the time to create a file for something that I probably wouldn’t apply unless I was working on something similar again in a neighborhood within a year or so.

      Here’s the thing. The market can change over time too. For instance, imagine in 2013 when inventory was extremely low (in my area at least) and investors were gutting the market. Buyers were so desperate for a few quarters that negatives like backing a busy street or being outdated weren’t as big of a deal during some transactions. In some senses buyers were willing to overlook some things because they were struggling to get into contract. Now imagine if inventory tripled. All of the sudden the location or condition issue might be more of a negative in the market. So if we pulled data from 2013 and kept it in a file but then applied it to today’s market with more inventory, can you see how we might apply an adjustment that made sense for one market and not today’s market?

      I hope that makes sense. It’s late and I’m finishing up some work. 🙂

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