Bad Home Data Can Lead to Bad Real Estate Deals
Ever wonder where all the information about your home that is spread all over the internet comes from? Is the information correct? Incorrect information about homes can lead to bad real estate deals and worse.
Several years ago I went on a pilgrimage to find out how Berks County compiles property data. I was specifically interested in how the square footage was calculated and posted in public records. What I discovered was surprising.
At that time I met with the Director of Real Estate for the Berks County Assessment Office. The Director stated that there were not enough resources to field measure every home in Berks County. While it was never made clear to me how the majority of home square footage published in public records were calculated, I was told that In certain cases, a curbside measurement had to be taken using one's thumb as a scale. So if your thumb is one inch and each inch is 10 feet at a certain distance, looking through one eye and you stand that same distance from the home and hold your thumb up to the home you can assess the square footage with an acceptable degree of error.
To this day, I am still unclear as to what "an acceptable degree of error" means. What I can tell you is how that "acceptable degree" can lead to bad real estate deals and compression of the whole real estate market here in Berks.
The Issue With Inaccurate Square Footage Data
Home price leadership often comes from two sources, new home construction, and luxury home sales. New homes are often more expensive than their resale counterparts. Appraisers do not give more value to a home based on age, so when the buyer loads up a new home with extras, and it sells for more it creates a comparable sale at a higher price, and raises the bar on appraisals and ultimately property values at large.
Upscale homes that sell for more also push the value bar higher. If luxury homes in Berks go up, they will pull other homes up as well. If they go down, then compression takes place. Say homes that would normally sell for $1,000,000 only sell for $750,000. The homes at $750,000 would likely sell for considerably less. This decreased value trend permeates the overall market and puts a lid on property values across the board. Even if lower-valued properties go up, their rise will be limited.
It is my experience that many of the larger and more expensive homes in Berks have inflated square footage data listed in public records. This data is used all over the internet, in the multi-list, and ends up in appraisals. If a home is listed at 6,000 square feet and it is actually 3,900 square feet, it creates a valuation problem for other 3,900 square foot homes that are listed accurately.
A real-world example
A home is sold for $775,000 in a particular neighborhood. The buyer needs to acquire a mortgage to fund the purchase, so the lender orders an appraisal. The home has 3,600 square feet but is listed in the public record as having 6,100 square feet. The agent recognizes the gross error and accurately lists the home at 3,600 square feet, so it is noted in the multi-list that way. The appraiser uses the 3,600 sq ft and looks for comparable home sales.
The appraiser finds a home in the same neighborhood that sold for $785,000 listed at 6,200 square feet and uses it as a comparable. The comparable home's square footage came from the public record and auto-populated into the multi-list. The appraiser was never in the comparable home and must use the data given in the MLS. The appraiser notes that the subject home is 2,600 square feet smaller and uses a calculation of $30.00 per sq ft. Because of the square footage discrepancy, there is a deduction of $78,000 from the subject home's appraised value. Given no other variables, the subject home will appraise at $707,000 which is far below the contract price of $775,000 and put the home sale in jeopardy.
Upon further review, it is discovered that the comparable home's actual square footage is only 3,900. The real estate agents involved were fortunate enough to find the home building plan for the comparable property which disclosed the correct square footage data. Now there is only a 300 sq ft difference, and the adjustment is only $9,000 and not $78,000, a significant difference which could save the deal.
It was fortunate the agents had the information they did but how many of these types of dealings happen without the aid of accurate data. If the home did not appraise and sold for less, it would undoubtedly be used as a comparable sale and negatively affect other sales. Remember that compression thing?
What to do?
The Berks County Assessment office states the following on their web page "The Assessment Office maintains ownership and assessment records for parcels within Berks County and ensures that all new construction is measured, described and assessed." This process is a much better way of handling the property data issue but what happens with the homes that were not measured correctly? These older homes are listed hundreds, if not, thousands of square feet more than they are? The lack of accurate past data will continue to negatively affect sales and appraisals moving forward especially now that the newer homes will be accurately listed with less square footage than the older counterparts.
In my humble opinion, there are two ways to handle the situation. One would be to completely eradicate ALL listing of property square footage from the public record. By doing this, the errored data would not end up on real estate websites and multi-list system. Real estate agents would have to measure houses. Appraisers would then know where the information on the home's square footage originated and be able to discuss it with the Realtors.
The second solution is to create a system where every time a home is listed by a real estate agent or appraised the square footage measurement would be reported to the county. The Assessment Bureau could then randomly check properties for accuracy. This type of system would take some time to develop, but it could ensure that appraisers have more accurate, or verified, data on comparable home sales.
Much rides on square footage value adjustments as it relates to banks lending homebuyers money. Appraisers have a tough job, made more difficult when the data they use to assess properties is wrong. Let's face it; we need many things to go our way economically here in Berks County. Inaccurate or bad home data does no one any favors. Having accurate property data is the least we can do to advance the all-important housing value agenda. It sure would beat dealing with bad real estate deals!
Knowledge is Power!
Jeffrey C. Hogue