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ANSI

Can it count in the square footage?

October 20, 2020 By Ryan Lundquist 31 Comments

Can you include it in the square footage? I get questions like this almost every week. Is it okay to count an accessory dwelling in the living area? What about a pool house? How about a man cave or she shed? Let’s talk about this.

The straight dope: It’s tempting to lump something else in the backyard into the square footage, but that’s not appropriate per ANSI measuring standards. Basically if you have to walk outside of the house into something else that is not directly accessible to the house, we’re really dealing with something that isn’t considered to be a part of the main house. So we call that something else a studio, casita, accessory unit, pool house, she shed, or whatever. It’s just not the main house, which is why it’s not included within the square footage. 

New video: I made a video to talk through some things to watch in the fall market. Enjoy if you wish (or watch here).

An Example: If you have a house at 2,500 sq ft and an accessory unit at 1,200 sq ft, it isn’t a 3,700 sq ft house. No, this is fundamentally a 2,500 sq ft house with something else. Could it be worth the same amount as a 3,700 sq ft house? Maybe. But if we only compare this type of home with other 3,700 sq ft units, we haven’t really proved what a 2,500 sq ft house with a 1,200 sq ft accessory unit is worth. The best comps will be other homes with accessory dwellings, right? Heck, maybe it’s worth even more. But we’ll never know unless we find the right comps to tell the story of value. The quick “comps” are all 3,700 sq ft, but those might not be the best representations of value.

The problem: If a property is priced based on a lumped square footage, what happens when the appraiser gets out there and needs to use smaller-sized comps that are consistent with the actual size of the main house? Is there going to be a difference in value?

The truth: It’s not an easy pill to swallow when the appraiser doesn’t include the extra space in the square footage, but just because it doesn’t count in the square footage doesn’t mean it doesn’t count in the value.

But they’re lumped together in MLS: I know, this happens all the time. A property will be sold with a lumped square footage of the main house and the pool house. We even see this happen at times in Tax Records. Let’s remember a few things: 1) The way a property is marketed doesn’t change what a property is; 2) As a non-lawyer I wonder if there is increased liability for representing a home at a larger size than it is (hopefully there is an asterisk that clarifies what the square footage represents); 3) The appraiser is very likely going to treat the two areas differently instead of lumping them together.

My advice? Instead of quickly pulling larger “comps” right away, try to isolate features such as a pool house, accessory dwelling, or outbuilding to determine what they’re worth in addition to the value of the main house. In other words, what is the main house plus the extra thing in the backyard worth? That’s the math market equation we have to figure out and it can be done by pouring through lots of data. Finding a few examples of homes that have sold with that feature is the ideal so we can try to discover what that feature commanded in terms of value. Sometimes we might even look through years of sales too. Remember we might not use really old sales as comps, but we can certainly use them for research.

Resources:
Q&A on accessory dwellings
Tips for valuing ADUs
Using older sales is sometimes the best option
Can a basement be considered square footage?

Anyway, I hope that was interesting or helpful. Thanks for being here.

Questions: Any stories to share? What follow-up questions or insight do you have? Did I miss anything?

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Filed Under: Resources Tagged With: accessory dwelling, accessory dwelling unit, ADU, ANSI, Appraisal, Appraiser, determining square footage, Greater Sacramento appraisal blog, House Appraisal, House Appraiser, pool house, sacramento regional appraisal blog, Square footage, what to include in the square footage

Price ceilings & literal ceilings that are too low

July 12, 2017 By Ryan Lundquist 13 Comments

I have two types of ceilings on my mind. How do you know when a market begins to reach its price ceiling for the season? And how low can a ceiling be in a home and still be considered legitimate square footage by an appraiser?

I recently inspected a house where the ceiling was 6 feet 8 inches high. Is that tall enough to count? Is there such a thing as too low? Let’s talk about it. 

How low can a ceiling be? Lots of people think 8 feet is the minimum ceiling height because that’s a common height in most homes, but it’s actually 7 feet according to the American National Standards Institute (ANSI Z765). Technically ANSI says it’s okay to have a ceiling height at 6’4″ under beams though. Keep in mind sometimes a ceiling might have a downward slope like we see with a Tudor or the photo above. When ceilings slope really low, there is something called the “5 foot rule” where the appraiser can count any space above 5 feet as living area as long as over 50% of the ceiling area is at least 7 feet.

When appraisers observe houses with ceilings below 7 feet, they’ll typically email the lender and say, “Hey there, this property has a ceiling less than 7 feet, and that doesn’t cut it according to ANSI standards. How do you want me to proceed?” After hearing that there’s a good chance the lender might not want to do the loan. Of course a property with low ceilings can still have value and even be appraised, but it may need to be marketed to an investor paying cash instead of a buyer using conventional or FHA financing.

Market price ceilings: Switching ceiling gears, how would you know if the market was beginning to reach its price ceiling for the season? That’s a great question to ask since many markets in the United States are going to be doing just that over the next couple of months. As I said in June, the Sacramento market is beginning to slow down even though we don’t see it in the sales stats yet. This doesn’t mean the market is cold or values are declining. It only means we are seeing subtle clues to a slowing market as high altitude values from the spring are at the beginning of a downward seasonal descent.

Umm, please don’t say the market is slowing!!!

At times it’s not very popular in the real estate community to publicly talk about the market slowing, but it’s something that happens nearly every single year. I realize we have big headlines about the market being “hot”, and it really is in many way, but catching the symptoms of a slowing market is key for valuing properties (and it’s good for clients). I suggest starting to watch price reductions more closely because they’ve been increasing lately in Sacramento and this is one of the first signs of a slowing market. Also pay attention to days on market increasing in coming time along with some of the other factors above (including the sales to list price ratio). I highly recommend asking other real estate professionals the question, “What are you seeing out there?” It’s amazing the type of insight you can glean from title reps, loan officers, appraisers, agents, escrow officers, etc…

I hope that was helpful or interesting. Any thoughts?

–——-——- Big monthly market update (it’s long on purpose) ———–——-

Values showed an increase again last month and sales volume was very steady compared to the past few Junes. Overall most price metrics were up 1-2% from last month, though the month prior they increased 2-4%. Inventory is still down about 20% from last year, and properties have been selling like hotcakes in only 9 days (that’s the median). In case you wanted to know, most price metrics are up about 7% from last year. One interesting thing to watch is FHA sales are starting to sag more noticeably as they ticked down a few percentage points to 21% of the market in Sacramento County. Granted, 1 in 5 sales is still quite a bit of FHA volume, but last year we were seeing 1 in 4 sales go FHA. It’s easy to think this means first-time buyers are getting squeezed out by Bay Area buyers, but that’s not really the case. My sense is the downtrend is due to more would-be FHA buyers using competitive conventional products instead of FHA. Lastly, it’s worth noting Curbed has a glowing article about Sacramento (cool that they quoted me too). This article is starting to go viral and it’s bound to get many locals pumped on how “hot” the Sacramento market is. Yet despite being “hot” in many ways, let’s remember to look for the signs of a slowing market because we have to realize the market usually hits its seasonal price ceiling right about now (but we won’t see it in the sales stats for a while). I could go on and on with words, but let me share some graphs to show the market visually.

DOWNLOAD 74 graphs (and a stat sheet) HERE: Please download all graphs in this post and more here as a zip file (includes a stat sheet too). See my sharing policy for 5 ways to share (please don’t copy verbatim).

Sacramento County graphs this month (more graphs & stats here):

Sacramento Regional graphs this month (more graphs & stats here):

Placer County graphs this month (more graphs & stats here):

DOWNLOAD 74 graphs (and a stat sheet) HERE: Please download all graphs in this post (and more) here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: Any low ceiling stories to share? Is the price ceiling for the season just about here? Did I miss anything? I’d love to hear your take.

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Filed Under: Market Trends Tagged With: 5 ft rule, ANSI, appraisals, Appraiser, average sales price, avg price per sq ft, cash purchases, ceilings are too low, days on market, FHA, foreclosures, Home Appraiser, hot market, house appraisals, increasin market, Median Price, Placer County real estate trends, Sacramento County real estate trends, Sacrametion Regional Market, seasonal slow down, sensational news, trend graphs

Can a basement be considered square footage?

May 27, 2014 By Ryan Lundquist 41 Comments

Can a basement be counted as square footage? Should you include the basement in the square footage when trying to sell a house? These are good questions. I’ll give you a standard answer that will cover most basements, but then let’s dig into the issue since cookie cutter answers don’t always fit every property.

Luis Sumpter Basement Photo

A Standard Answer: Basements should NOT be included in square footage according to Fannie Mae and ANSI guidelines. In short, if the area is below ground level, it doesn’t count as living space. This does not mean a basement cannot contribute to the value though. After all, buyers will probably pay more for a property if it has a basement – sometimes a substantial amount if it is dialed in as a man cave, office, craft room or layer for the teenagers. But no matter how nice a basement has been finished, it does NOT get counted in the square footage (again, it can still be counted in the value – but not as living space). The same holds true for an addition that is above grade, but not connected to the house. This means it probably isn’t a good idea to include the basement in the total living space when selling, but rather find a way to highlight the finished basement and house separately. One other important consideration is that buyers may not be willing to pay the same price per sq ft for a basement as they would for standard above-grade living area.

basement Brian McMartin

The Loophole: However, there are some funky cases where appraisers and the real estate community can deviate from this rule and actually include a basement in the living area. Let’s see what the Fannie Mae Seller’s Guide (PDF) says.

Image-purchased-at-123rf-dot-com-and-used-with-permission-14688774_s-smallerFannie Mae’s Sellers Guide (pages 581-582): “Only finished above-grade areas can be used in calculating and reporting of above-grade room count and square footage for the gross living area. Fannie Mae considers a level to be below grade if any portion of it is below grade, regardless of the quality of its finish or the window area of any room. Therefore, a walk-out basement with finished rooms would not be included in the above-grade room count. Rooms that are not included in the above-grade room count may add substantially to the value of a property, particularly when the quality of the finish is high. For that reason, the appraiser should report the basement or other partially below-grade areas separately and make appropriate adjustments for them on the Basement & Finished Rooms Below-Grade line in the Sales Comparison Approach adjustment grid. For consistency in the sales comparison analysis, the appraiser should compare above-grade areas to above-grade areas and below-grade areas to below-grade areas. The appraiser may need to deviate from this approach if the style of the subject property or any of the comparables does not lend itself to such comparisons. For example, a property built into the side of a hill where the lower level is significantly out of ground, the interior finish is equal throughout the house, and the flow and function of the layout is accepted by the local market, may require the gross living area to include both levels. However, in such instances, the appraiser must be consistent throughout the appraisal in his or her analysis and explain the reason for the deviation, clearly describing the comparisons that were made.”

tiny basement - sacramento appraisal blog

Why I counted a “basement” in the square footage: There are some instances where a basement can be considered square footage. This can be very tricky though and not every appraiser or lender will see it this way either. The truth is Fannie Mae does allow appraisers to deviate from the traditional below grade rule in certain cases. For instance, I appraised a property where the “basement” was the only level in the house that had any bedrooms or bathrooms (besides a 1/2 bathroom upstairs). The layout was definitely unique, but the city recognized the bedrooms and bathroom as square footage, and the market seemed to accept the space as living area in light of the previous sale on MLS. At the end of the day I could not argue against the market viewing this “basement” as living space, so that’s what I called it. Of course there is usually more than one way to solve a problem, which means I could have considered this area as a traditional basement while accounting for major functional obsolescence because there were no bedrooms or full bathrooms on the first level. But ultimately when looking at the whole picture, and especially the previous MLS sale helping to show how the market viewed this property, I chose to deviate from the traditional below-grade rule. I talked this over with my client and of course disclosed exactly what I was doing and why I was doing it in multiple places in the appraisal report. While it can be uncomfortable to make an unconventional call like this, I believe it was a reasonable methodology for this situation. I am very cautious about deviating from this rule though in most cases.

bedroom in a basement - by sacramento appraisal blog

An Almost Example with Zoning: I can think of a quick example where I almost included a basement as living area. A highwater bungalow had a very nicely permitted additional unit below the main house. This addition was about two feet below grade, so it was technically a basement. However, this property sold twice on MLS as a duplex, and by all standards seemed to be a duplex – albeit a funky one. But there was at least one main problem. Zoning in this area mandated a duplex had to be located on a corner lot. Since the subject property was not located on a corner lot, it could not be considered a duplex per the planning department. This meant the subject property was really a single family home with a finished basement apartment (as opposed to deviating from the below-grade rule and considering the lower unit as living space counting toward the total square footage of the home).

The Main Point: There are unique situations where appraisers should legitimately consider a “basement” in the square footage, but the vast majority of basements should NOT be counted as living space (think 99.9%). Just because a basement is not included in the living space though does not mean it is worthless. If you are selling a home, the basement can definitely add to the total value. The key is knowing your market and studying sales with and without basements to determine what buyers are willing to pay for a basement.

Thank you to Realtor Luis Sumpter and Realtor Brian McMartin for the photos.

Question: Any stories, insight or questions? I’d love to hear your take.

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Filed Under: Appraisal Stuff, Resources Tagged With: above grade, add basement to square footage, ANSI, appraiser in Sacramento, appraisers and basements, basement as living space, basements, below grade, Brian McMartin, can basement be square footage, Fannie Mae Seller's Guide, GLA, gross living area, how appraisers think, Luis Sumpter, Sacramento Real Estate, value of a basement, zoning

Minimum ceiling height and hobbit houses

July 10, 2012 By Ryan Lundquist 6 Comments

Have you ever wondered how low ceilings can be to be considered legitimate square footage? Obviously there has to be a limit, right? After all, it wouldn’t seem too livable if ceilings were 4 feet high (unless for hobbits maybe).

What does the ANSI-accredited standard on square footage say? “To be included in finished square footage calculations, finished areas must have a ceiling height of at least 7 feet (2.13 meters) except under beams, ducts, and other obstructions where the height may be 6 feet 4 inches (1.93 meters); under stairs where there is no specified height requirement; or where the ceiling is sloped. If a room’s ceiling is sloped, at least one-half of the finished square footage in that room must have a vertical ceiling height of at least 7 feet (2.13 meters); no portion of the finished area that has a height of less than 5 feet (1.52 meters) may be included in finished square footage.” (“ANSI” stands for “American National Standards Institute”).

7 foot ceiling height and "5 foot rule" photo by Sacramento Appraisal Blog

In short, while it wouldn’t bode well for most NBA players, 7 feet is the low ceiling height limit, but the ceiling can be as low as 6’4″ under beams and other obstructions. Most houses tend to have 8 foot ceilings in the Sacramento area, so the ceiling height limit is typically not an issue – especially in newly constructed subdivisions. However, older areas and classic neighborhoods like Curtis Park, Land Park and East Sacramento often need to take ceiling height limits into consideration for finished attics and sloped ceilings.

Hobbit Houses and Square Footage: This brings us to the big question of whether hobbit houses could be considered as living area. If you don’t know what a hobbit is, you really might consider renting The Lord of the Rings trilogy to get familiar (or read the books). Anyway, since ceilings in Hobbiton are much lower than 7 feet, they unfortunately don’t qualify as gross living area. On top of that, they are actually considered “below grade” since they are partially underground, which is not acceptable as GLA anyway under Fannie Mae standards. Here are two photos of Hobbiton in New Zealand (this is my 5’8″ Mom about 10 years ago). If you didn’t know, you can actually visit the former Lord of the Rings movie set.

Hobbiton in New Zealand

Hobbiton in New Zealand

Additional Square Footage Articles: You may also be interested to read Using the “5 foot rule” to calculate square footage, or Why do appraisers give such little value for square footage?, or Why is there a difference in square footage between official records and the appraisal?

Question: Does this make sense? Are you a Lord of the Rings fan?

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Filed Under: Appraisal Stuff, Resources Tagged With: 6'4" ceiling height limit, 7 foot ceiling height limit, American National Standards Institute, ANSI, appraiser in Sacramento, appraiser measuring square footage, ceiling height square footage, GLA, gross living area, Hobbit houses, Home Appraiser, House Appraiser, how low can a ceiling be, how to measure size of house, LOTR, measure living area, measure square footage

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