How Many Times Would You Like to Pay for That Basement?
Are you in the market to buy a home? A lot of people are. Spring time is usually when the real estate market really heats up. With the ongoing shortage of home inventory, real estate agents are working hard to make their listings more attractive than their competition. Attempting to do so, some are including the finished basement square footage in their gross living area estimates in the MLS. This is not a new trick! It should be noted that not all real estate agents use this tactic. But many do. I see this on a regular basis as an appraiser. In my opinion, it is unethical because it’s misleading to the consumer. How so?
IT CAN’T BE BOTH
When agents include the finished basement square footage in their gross living area (GLA), they usually also indicate in their listing that the property has a basement. What they are falsely indicating is that the property has 'X' amount of square feet of GLA (They include the finished basement in this sq. ft.) in addition to having a basement. That is what we call double dipping. Double dipping on any level is not cool! The finished basement area cannot be both a basement and gross living area. For example, if an appraiser is appraising a bi-level dwelling, for non-lender work, and they include the partially below grade finished area in their GLA, they have to say that the property has no basement. Or, they can value the partially below grade finished area as a finished basement. (A much more supportable approach) But, they would not include this area in their GLA.
It should be noted that both Fannie Mae and FHA guidelines state that any portion of home that is even partially below grade cannot be included in the GLA. Even if there is a walk-out entrance. Most home owners and even some realtors are not aware of this.
When real estate agents include the finished basement square footage in the GLA, it waters down the price per square foot. That hurts the listing. This is one of many reasons why trying to use the price per square foot to estimate the market value of a property is faulty. Appraiser Ryan Lundquist, of the Sacramento Appraisal Blog wrote a great article on this subject entitled 'Explaining How Price Per Sq. Ft. Doesn't Work'. I would encourage you to read it!
Another consequence is that it skews data in the MLS which makes the reports that other realtors and appraisers rely on less accurate. Garbage in, garbage out.
Another consequence is inaccurate list pricing. Many times, when the market value is less than the contract price, this is a big factor. The list price in these cases is determined with the false premise that the home is larger than it is. An appraiser will physically measure the home and based the appraisal on their more accurate GLA measurements.
Here’s a sobering thought. What if you qualify for a PIW (Property Inspection Waiver) and you decide not to have the appraisal completed? You could be paying for two basements! So, if you qualify for a PIW, it would be wise to still have an appraisal completed. Or at a minimum, hire an appraiser to measure the home and let you know what the real gross living area is. You’ll be glad you did!
When it comes to reporting the GLA inaccurately, there’s really no upside.
In the end it just wastes everybody's time and, even worse, can lead to paying more than market value! Buyers beware!