There was a recent article published in the Utah Division of Real Estate Quarterly Newsletter by Jonathan Stewart, Division Director, regarding residential living area.
Director's Message Jonny Stewart
Utah Division of Real Estate 2nd Qtr 2018
Square Footage, Gross Living Area (GLA), and Finished Basements
This year in several locations on CARAVAN we had discussions about measuring residential home square footage, and specifically whether a basement square footage should be included in the Gross Living Area (GLA) calculation. There were some differences of opinion among appraisers and real estate agents/brokers about the value of basement square footage and whether it should count towards GLA. When an appraiser appraises a residential property, there are different guidelines they could be required to follow, depending on the financing and type of property. Ultimately the appraiser and lender should determine what standards should be followed when appraising a property for lending purposes. According to Thomas Hardwick, a Certified General Appraiser from Michigan, there are generally recognized guidelines (including the Fannie Mae Selling Guide, FHA/HUD Handbook 4150.2, Employee Relocation Council (ERC) Appraisal Guide, American National Standards Institute (ANSI) Z765-2003, etc.). To varying degrees, these guide lines define Gross Living Area, [and] Basement/Below Grade Floor Area… [T]he appraiser and the lender should determine the level of detail necessary in calculating the home's square footage.
The main message I've received from appraisers is that these guidelines are used to create consistency in valuing properties. For example, if you had two properties in the same neighborhood, exactly the same square footage, and exactly the same quality, but
one property had 3,000 square feet on the main level and the other property had 1,500 square feet on the main level and 1,500 square feet in the basement, which property should have a higher valuation? Most, if not all, would say that the property that is 100% above-grade would have a higher valuation. In most cases appraisers compare and adjust for differences in basement size separately from differences in above grade GLA. In addition, these appraisers have said that they do not include basement square footage in GLA for the reasons I have mentioned above, mainly for consistency when comparing one property to another.
To understand this better, here are guidelines from Fannie Mae and FHA/HUD that appraisers may be required to follow when appraising a property:
Gross Living Area Fannie Mae Selling Guide, May 1, 2018
B4-1.3-05, Improvements Section of the Appraisal Report The most common comparison for one-unit properties, including units in PUD, condo, or co-op
projects, is above-grade gross living area. The appraiser must be consistent when he or she calculates and reports the finished above-grade room count and the square feet of gross living area that is above-grade. When calculating gross living area • The appraiser should use the exterior building dimensions per floor to calculate the above-grade gross
living area of a property.
For units in condo or co-op projects, the appraiser should use interior perimeter unit dimensions to calculate the gross living area. • Garages and basements, including
those that are partially above grade, must not be included in the above-grade room count. 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.
FHA/HUD Guidelines 4150.2 Property Analysis Gross Living Area is the total area
of finished, above-grade residential space. It is calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space.
Basements and Below-Grade Finished Areas
Fannie Mae Selling Guide, May 1, 2018 B4-1.3-05, Improvements Section of the Appraisal Report
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.
4150.2 Property Analysis
Finished basements and unfinished attic areas are not included in total gross living area. The appraiser must match the measurement techniques used for the subject to the comparable sales. It is important to apply this measurement technique and report the building dimensions consistently because failure to do so can impair the quality of the appraisal report.
Another standard appraisers may voluntarily use, but is not required, is the American National Standards Institute (ANSI) SQUARE FOOTAGE–METHOD FOR CALCULATING: ANSI Z765-2013. Simply put, ANSI states: "The above-grade finished square footage of a house is the sum of finished areas on levels that are entirely above grade. The below grade finished square footage of a house is the sum of finished areas on levels that are wholly or partly below grade."
According to ANSI, above-grade and below-grade square footage should be reported separately to more accurately compare properties.
It is important to understand that one of the main reasons for these guidelines is for consistent reporting of the square footage from one property to the next. Above-grade square footage should be compared to above-grade square footage, and below-grade to below-grade. Fannie Mae does allow appraisers to deviate from these guidelines if a property is built into the side of a hill, where the majority of the lower level is outside of the hill, and the interior finish is equal to that of the rest of the house. In these cases, the appraiser could include the lower level in GLA, but Fannie Mae is clear that appraisers should be consistent when deviating from guidelines.
Craig Morley, former Chair of the Appraiser Certification and Licensing Board, has the following advice for appraisers:
Know what measurement standard is being used by the data verification source so that inappropriate adjustments for size are not being made due to inconsistencies in measurement standards.
Appraiser should be aware of the various measurement standards and explain to the client what standard is being used. If there are inconsistencies, the appraiser should understand and explain the inconsistencies and explain why or why not adjustments are made.
Don't be too mechanical in the application of size adjustments. If it is evident that the subject is the same or a similar model, but the data source is reporting inconsistent areas, either don't make adjustments or explain the rationale of your adjustments.
Be consistent with what is customary in the market you are working. Most of the GSE's expect that the appraiser will do what is customary for the local market area to preserve the integrity of the analysis. If the appraiser is not consistent with the market, there can be some significant errors in the value conclusions.
Appraisers have a difficult job when valuing real estate and accurately calculating square footage, and GLA is vital to a credible appraisal report. Keep in mind that although appraisers may not include below-grade square footage in the GLA, they will still give value to the square footage, especially if the finish is of high quality. We all want consistency in valuing real property, and when appraisers use appropriate standards and are consistent in their approach, appraised values will be more accurate.