When 1,000 square feet doesn’t count

One of the most interesting homes I’ve seen just sold. It was brand new, four stories, and a halfplex. Oh, and on paper it was 3,000 sq ft, but about 1,000 sq ft didn’t count in the square footage. This is definitely a conversation piece, so I’m thankful Realtor Brian McMartin agreed to do a Q&A. I hope this will be valuable and interesting. Any thoughts?

Quick points:

• This house has 1,000 sq ft that is not permitted as square footage.
• The “non-conditioned” space looks just like square footage.
• Understanding permits really does matter.
• We discuss how to value a home like this.
• This is ripe for lawsuits if square footage is misrepresented in the future.

Q&A with BRIAN McMARTIN

Ryan:  First off, how many stories did this property have? And how wide was it?

Brian: This halfplex has a total of 4 stories, including the ground floor where the garage is located. It is 17’ wide with a 3’ setback on the side. 

Ryan:  Tell us about the non-conditioned space.

Brian:  Ok – this can get a little confusing. This house has 2,065 sq ft as permitted living space, but the building has over 3,000 sq ft of usable space. It is hard to tell the difference between space that is permitted as square footage and other areas because the quality of construction is the same throughout (besides central heat and air not being present in the non-conditioned space).

Basically, the “conditioned” spaces that had permanent heat and air were on floors 2 and 3. On the first floor building plans show a non-conditioned “workshop”, but the sellers had it finished very nice and it presented like a huge game room or large living room. The 4th floor is described as a “sundeck” from the building plans, but again the sellers had the room presented nice with the same carpeting and fixtures as the rest of the home.

Ryan:  This sounds like a situation where someone is going to use the extra space as square footage.

Brian:  Even though it was not on the building plans, the sellers thought it would be okay to install separate wall mounted “mini-split HVAC systems”. However, during the final inspections the city made them remove these units as the building was not designed for habitable “conditioned” spaces on the 4th floor.

Ryan:  How did you treat this space in terms of giving it value?

Brian:  This was a huge challenge. The building has over 3,000 sf of usable space, but the property only has 2,065 of “conditioned” space. The room behind the garage and the 4th floor consisted of over 1,000 square feet of “non-conditioned” space. So, even though these rooms presented just like the rest of the home, they did not have heat and air. They have value, but I could not include these “non-conditioned” spaces in the square footage of the building any more than I could include a garage. These are permitted spaces, but not permitted for living area. Additionally, each floor of this property had two balconies, so I had nearly 600 square feet of balcony space to consider as well. 

I previewed every new home on the market in Midtown to review the competition. In the end, I came up with an estimated value based on the “conditioned” square footage and then added a range based on what value I felt the additional “non-conditioned” square footage added to the value. I had other challenges in marketing this property, but essentially we decided to “test” the market a little with a high range to see how the market would respond.

Ryan:  How did you report the non-conditioned space in MLS?

Brian:  I did not report the “non-conditioned” space in the MLS where you show the square footage of a home as this is not considered habitable square footage. However, I did mention the additional space in the marketing comments.  

Ryan:  This was incredibly smart of you to do. I can see someone not doing this in the future because this area looks just like square footage. It sounds like a lawsuit waiting to happen when the new owner finds out about 1,000 square feet not being permitted as living space.

Ryan:  Anyway, this is a unique layout to say the least. What sort of feedback did you get from buyers and agents about this one?

Brian:  Despite my best efforts to explain the difference between the “conditioned” and “non-conditioned” spaces, it was confusing to most agent and buyers which is understandable as this was very unusual. It was easiest to explain when I was at the property and was able to show people the building plans and answer their questions in person. 

Ryan:  How did you pull comps on a property like this since there wasn’t really anything out there?

Brian:  You are correct – there were no comparables in Midtown with this type of issue. In the end I used new construction comparable sales in Midtown and relied primarily on the “conditioned space” to come up with a base value.

Ryan:  What did you learn through selling this one?

Brian:  I learned a few things from this experience. In doing my homework on this property I learned that the there was a reason the builder did not have some of the areas as “conditioned” areas, especially on the 4th floor and it had something to do with the city requirements for having a habitable living area on a 3rd or 4th floor. I did not find out exactly what the conditions are with the city, but I was told that it had something to do with needing to install a separate egress when you build above the 3rd or 4th floor. Since the 4th floor was considered a “sundeck” and was not a habitable area, this requirement did not apply. This made sense to me later when I learned that the city made the builder remove the split HVAC systems from the 4th floor as it could not be considered habitable living areas and changed the nature of the intended use of that floor. Despite these area presenting as beautiful well-appointed rooms, it just created confusion for the buyers as to what the rooms could be used for and how it would benefit the homeowner. This confusion caused many difficulties in marketing this home.

Ryan:  What about the layout and interior?

Brian:  We had some design issues with this home and they were difficult to overcome. The exterior presented more of an industrial modern look, whereas the inside reflected more of a suburban contemporary look. Additionally, the floorplan was clunky and inconsistent. So, despite having a brand new home, nearly every buyer was considering how much it would cost to redesign the home to fit their needs and tastes.

Ryan:  Anything else you’d like to add?

Brian:  Yes, over the years I’ve noticed there is some general confusion over permitted structures and permitted habitable structures. For instance, I had a client once that had a small apartment in the back yard that they were renting to tenants. The sellers informed me it was built by a previous owner (and permitted). However, upon reviewing the apartment, it was apparent that modifications were made to the unit to add a small kitchen. Long story short, upon investigation we discovered and found that there were indeed permits for the structure, but it was not built as a habitable unit and at some point someone had added the kitchen to make it work for an apartment. The sellers were naturally upset as they purchased this property as a duplex or 2 homes on a lot and were not happy to discover that I could not market the home this way.

Ryan:  Any closing thoughts for real estate agents?

Brian:  Just because tax records shows a property as a certain size or having an additional unit does not always mean it is correct. I had a property in East Sacramento once that showed as a duplex but the downstairs unit was never properly made into a habitable unit. Additionally, I’ve found that the existence of separate meters on the property does not always mean the additional unit is permitted. In closing, if something doesn’t quite seem right about a unit or an additional space, be sure to ask more questions of your clients to make sure you are marketing the property correctly.  

Ryan:  Thank you Brian for doing this interview. You killed it. Everyone, you can check out Brian’s website here.

Closing appraisal thoughts: There is so much I can say, but the thing that stands out most is it’s really easy to include non-permitted space as square footage if we’re not careful. My advice? Don’t just ask an owner if it was permitted. What was it permitted as? That’s the better question. Moreover, if you see a huge discrepancy between Tax Records and what seems to be at the property, find out why there is a difference.

I hope this was interesting or helpful.

BEER & HOUSING CONVERSATION: Do you want to hang out at Yolo Brewing? On Saturday October 5th from 2-5pm we’re going to have a get-together. No presentations, agenda, secret handshakes, or geeky stats. This event was born on Twitter with Erin Stumpf. Hope to see you there. Details here.

Questions: What stands out to you most about the interview? Any thoughts on the house? I’d love to hear your take.

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