Why do appraisers sometimes give such little value to something as important as square footage? It’s crazy that an appraiser gave $10,000 in value for 300 square feet, right? Maybe you’ve felt this way about an appraisal on your home or for one of your listings. Give me a minute to help clear up some of the confusion by explaining how appraisers are supposed to come up with value adjustments for house size.
Example 1: A Typical Size Scenario
Real estate appraisers should be giving value to square footage according to how the market sees the square footage. What does that mean? While it may cost $40,000 for a 400 square foot addition, based on an analysis of comps in a neighborhood, the appraiser might determine properties with an extra 400 square feet sell for $20,000 more than houses without that space. This means the market in this particular neighborhood really only rewards $20,000 in value for the size difference. This example of course assumes there are no other factors to consider such as lot size, location, upgrades, room count, financing etc….
Example 2: The McMansion Mega House
Imagine your house is 6,000 square feet in a neighborhood where the largest model is 4,000 square feet. Do you think the market is willing to pay 50% more for you house because it is 50% larger than the 4,000 square foot model? Probably not. There are situations where the market is actually willing to pay very little or nothing for the extra square footage because it’s considered an overimprovement (or “superadequacy” for the fancy term). This can be very upsetting for home owners and agents, but the appraiser is not being mean or ruthless, but only interpreting the market properly (hopefully).
This is important to understand for the following reasons:
- Cost vs. Value: Appraisers do not give value to square footage based on construction costs, but rather the reaction in the marketplace to extra size. Think of it in terms of a kitchen remodel or pool. Just because a kitchen costs $75,000 to remodel does not automatically mean you’ll see $75,000 in value in the resale market. Or while a pool may cost $35,000, resale value will very unlikely include the total cost of the pool. Cost does not always equal value.
Additions & Conversions: An addition or garage conversion may not always put your house on par with other larger houses. There are many factors to consider when it comes to valuing an addition. It’s important also to know the neighborhood before planning a huge addition because you don’t want to overbuild for the neighborhood.- The Largest House: Larger houses tend to have an overall lower price per square foot than medium-sized houses, so applying a straight cost-per-sqare-foot for the neighborhood may not yield credible results for the largest house.
- Big New Construction Premiums: If you buy a newly constructed mega-house like in Example 2, you will likely pay a big premium for the extra square footage during the sale, but you may not see this premium again when reselling.
- Real Estate Agents: Agents who know the local market and how appraisers should look at square footage will be able to coach and resource home owners about the process and what to generally expect.
- Unique Neighborhoods: Each market is different. There is no standard price adjustment for appraisers to make because buyers in one area may be willing to pay more or less for size compared to another neighborhood.
All things considered, it’s not always easy to swallow that a big difference in square footage does not always translate into big value. Let me make it clear too that just because I explained how an appraiser is supposed to give value for square footage does not mean that the appraiser actually did that.
Any insight, questions or commentary? In appraisal reports you’ve read, how much value do you see appraisers give for square footage? I’d love to hear your comments.
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Great points Ryan. The cost-value topic is very hard for many homeowners to understand, however after they know how these things work it helps them make better investment decisions with their homes.
Well said, Tom. I think it’s not an easy pill to swallow. I find the pool analogy to be helpful since most people know the cost of a pool is not recovered in the market hardly at all. You’re a great resource, Tom.
One of your best blogs! I might have to spread it around.
Thanks, Tim. I really appreciate that. That made my day!
Hey Ryan, what are your thoughts on this formula for GLA?
By Adding All Of The Price/Gla Of The Comparables. I.E 6 Comps, Price/Gla Total = 900 and Divide The Total By The Number Of Comps 900/6 = 150.00, That Is The Average NowDivide That Average By 5 (Its Always Five Regardless Of The Number Of Comps Used, Because The Gla Is 1/5 Of The Marketable Value Of The Home)
150 / 5 = 30.00 The Number Is Used For The Gla Adjustment And It Gives A Viable “Marketability” Gla Number, In Other Words, What The Market Demands Per Extra Square Foot. This Works Because It Not Only Takes Into Consideration The Actual Sales Value Per Gla Of The Comparables, It Isolates The Gla From The Land And Various
Amenities Of The Various Markets And Allows For A More Uniform Adjustment Per Each Market Based On That Markets Demand For Additional Gla In Relation To Its Price/Gla. In Technical Terms, The Relationship Of The Overall Demand Per The Market Is Directly In Relation To The Price/Gla, Which Includes The Land Value. When A Percentage Of That Average Price/Gla Is Separated Out (In This Case 1/5) It Tends To Isolate The Other Influences Mutually Exclusive From The Gla, Which Evidently,
Appears To Be An Excellent Uniform Adjustment For Every Market. It Is Supposing That The Gla Of The Home Has A 1/5 Relation To The Overall Marketability.
What Are The Five Biggest Factors That Make Up A Value Of A Home.
1.) Location (Reflected In The Land Value And Location Adjustments (Neighborhood))
2.) Gla
3.) Style And Quality
4.) Functional Utility (Bedrooms, Baths, Layout, Ac, Decks, Amenities)
5.) Age And Condition
Kelly, thank you for taking the time to write that out. Very interesting. I’m curious who made up the rule that that there are only 5 categories? And how is it that GLA is always exactly a 1/5 proportion in the market? I can imagine a run-down 500 square house on the Sacramento River, and my guess is the land would be a far greater contributor to the overall value than just 1/5. Personally, a forumula like this sounds enticing on some levels because it could potentially yield easy answers, but ultimately it may impose a contant rule on the market that just wouldn’t fit. Let me know if you have further insight. Thanks again, Kelly.
Hey Ryan,
I find this formula very interesting. It was from an appraisal seminar about underwriting and what not. It came from the banks underwriting dept. I like to plug in my numbers and see how it compares to my adjustments. It seems more accurate on tract housing,not anything out of the ordinary!
I see. It wouldn’t shock me at all to see formulas like this used in the underwriting world. Hmm…. Thanks Kelly.
Just saw this. Nicely explained Ryan! Great points, and even better I chuckled at the “disclaimer” you may have explained it one way, doesn’t mean that’s the way the appraiser will do it.
Thanks Jennifer. I appreciate it. Yeah, those disclaimers are important. 🙂