Rest assured, everyone
involved does sympathize with you. Also rest assured that the house is not
being penalized for having some of the finished living space in the basement
(below grade area). Indeed, everyone is conscious of the issues involved. As
home sellers and homebuyers become more savvy, all have become aware that
square footage is a key factor in the sales price. Understandably then, the
seller wants as much counted as possible while buyers do not want to pay for
something they didn’t get. So, while the whole process is confusing and
appears arbitrary, there actually is a method to the madness.
What started the whole
business was the Federal National Mortgage Association, which goes by the
acronym FNMA, but which some creative Washington wit has dubbed "Fannie
Mae." Fannie Mae is the reason that you can easily sell or buy a house.
Why? Because this quasi-governmental organization was established to buy
individual mortgage notes from lending institutions and then package blocks
of mortgages into single securities instruments for sale to investors. But,
to be able to do this, the entire lending industry had to change the
individualistic way it did business.
That is, in the "old
days," mortgage loans were made primarily by Savings and Loan
institutions which were operated from one location in the community and had
long-term staff and officers who knew the community very intimately. Each of
these S&Ls made loans based upon their own loan standards and as often
as not, their personal knowledge of the borrowers. The S&L made loans
and kept them on the books for 20 or 30 years. Therefore, unless deposits
grew, the number of loans any one S&L could make was limited.
Then Fannie Mae came along
and said, "we’ll buy your loans, thus returning your capital (at a
profit) so you can go out and make other loans"--Practically an instant
success because this made mortgage loans available on an unprecedented
scale. This in turn made it easier to buy and sell houses and the real
estate industry was transformed; this included the birth of the residential
appraisal industry as we know it today.
However, there was a price to
pay. In order to package mortgage notes into a homogeneous block, all had to
be written using the same guidelines for loan-to-value ratios, for income
ratios, for credit worthiness, and for how a
house was measured, and so forth. Thus the phrase conforming
loan was created. Don’t confuse this with conventional loan. The
phrase conventional loan is used to indicate that the loan is not FHA
or VA backed.
So, Fannie Mae, not knowing a
barn from a basement, asked the American National Standards Institute (ANSI)
how to measure square footage. ANSI said, in effect, OK, since the majority
of basements in the USA are surrounded with dirt (below grade), and have no
windows, they are basements regardless of what’s there and we don’t care
if there are exceptions because we want a one-size-fits-all standard."
Therefore, everything above
grade was to be counted as Heated Living Area (HLA) if finished
(walls, floor, and ceiling), heated from the same source, and is all
connected. How to measure these areas was made relatively easy. Measure
around the perimeter and include everything inside; halls and closets, even
the dead space inside the studwalls. Above grade laundry rooms and furnace
rooms are included as long as they are heated, finished, and attached.
The stairway from the first
floor to the second is basically counted twice, once for each floor; the way
to conceptualize this is to think of the stairs as part of the second floor
and think of the space below the stairs as storage for the first floor—the
important criterion is that both spaces can be used (ignore the fact that
there is not much useable space at the back of the understair area).
Following this logic, atriums or two story open areas next to stairs can be
only be used for one of the floors, so these areas are only counted once.
Apply the same yardstick to cathedral and vaulted ceilings. This is
basically how everyone measures HLA. Note that while some of this might not
seem to make sense, the idea was, make it as simple as possible. If, for
example, we measure studwall cavities for everyone, then everyone gets the
same credit. Now, while there are some other minor "how-to’s",
if you understand the above, you have mastered the basics.
However, just when you
thought it was getting simple, we move on to the so-called bonus room over a
garage or in an attic. Just like basements, homeowners and builders
"discovered" that these areas provide cheap ways to expand space.
So, the first criterion for including this space is whether or not it is
accessible through finished space. If not, it’s not part of the
counted square footage, but rather, is a bonus room.
Then getting past that, comes
the issue of height—less than 84" (seven feet) and it’s bonus area,
not heated living area. That part is pretty logical; any thing under seven
feet and you would feel like you are in cave. There is also a certain logic
here; buyers will look at a low ceiling area and say, "whoa, I don’t
like that, I may buy the house, but I’m not going to pay full market value
for that portion."
However, here’s the hard
part. Attic areas and rooms over garages have sloped ceilings. According to
ANSI and some State Real Estate Commission guidelines, the average height
of the room has to be at least seven feet. In other words, get out your high
school geometry text book. Here’s the problem: (a) the flat part of the
ceiling is generally eight feet, (b) the side walls are generally five feet,
and (c) the sloped part obviously then goes from five feet to eight feet.
Now, all the agent or appraiser has to do is come up with the answer. Right?
We won’t torture you with
the figuring out the "answer" because there is not any one easy
answer. The important concern is that everything depends on the pitch of the
roof. Given two rooms with the same floor plan, but with different slopes
(pitch), one room could be included in Heated Living Area, while the other
would only be as counted as a bonus room. Why? Because the steeper the
pitch, the more area there will be over seven feet.
So, what’s a Real Estate
agent or Appraiser to do? Well, if the agent works in an area where the rule
is rigidly applied and he or she ends up with a "bonus" room
instead of space added to the advertised square footage, he or she bites the
bullet, cringes, and tells the soon-to-be unhappy homeowners they have 264
square feet less than they thought. On the other hand, your happy-go-lucky
Appraiser does not have the same dilemma because he or she has more latitude
(within the access and height constraints) to use judgment and determine
whether the room’s functional utility makes it a bonus room or part
of the heated living area (this goes back to the "whoa, this feels like
a cave" concept). The vast majority of Appraisers are not going to
split hairs on this issue and will include most so-called bonus rooms (but
not all) in total heated living area.
Now, getting back to
standardizing loans, Fannie Mae also devised a form that was to be used for
all conforming loans. This form is the cause of the above grade/below grade
debate. It is called a Uniform Residential Appraisal Report (URAR). The URAR,
the primary form used by appraisers and mortgage lenders to
define and value a residential property, is two 14 inch pages. Approximately
half of the second page is devoted to physical descriptions of your property
and three other properties we will use for comparison purposes. Of this
space, approximately ½ inch is devoted to describing below grade space. In
other words, the appraiser is not encouraged to focus on below grade spaces.
However, don’t worry; appraisers have gotten pretty creative when using
that ½ inch to describe finished basement areas.
This philosophy that the
basement doesn’t count much works OK in the north where land tends
to be flat and basement areas tended to be there only because frost lines
required digging deep foundations--nice place to put the furnace and washing
machine (the mother-in-law came later).
In flat areas of the south
and west, there is no issue because basements generally are not built.
However, in areas that are not flat, basement walls tend to be half below
grade and half above grade (typically called walkout or daylight
basements—yet they are still thought of as basements by ANSI and Fannie
Mae. But, things have changed from the infamous paneled basement
rec room that homeowners added in the 50s and 60s. Builders have decided
that below grade space is too precious to devote to a furnace and
washer/dryer; so, now in goes window wells to create sunlight, a bedroom,
bath, and family room—all of quality equal to the above grade space.
Thus the debates: Appraisers
have to use the URAR; real estate agents do not. So historically, agents
have generally taken the common sense approach and said, "well, its
finished and I’m counting it." Then, because Fannie Mae says so, the
appraiser comes along and uncounts it. No
wonder buyers and sellers ask that question, what do you mean it doesn’t
Actually, there is no real
debate. Both Real Estate agents and Appraisers are trained to determine
market value of a given home by looking for at least three homes that sold
recently that are as similar to the subject as possible. These recent sales
are called comparables—comps for short. The ideal comp is exactly the same
(age, number of stories, garage, lot size, neighborhood, and so on). Of
course, the perfect comp does not exist, but that is where the art comes in.
Now, getting back to the
finished basement and bonus areas. Competent Appraisers and Real Estate
agents will look for comparables with similar areas above and below
grade. And, ideally both used the same comps. They just add the space up
differently. An appraiser will look closely at the 2000 square feet that the
real estate agent advertised, see that it is 1000 square feet with one story
above grade, 1000 square feet below grade, and will look for one story comps
that have above and below grade finished space (and will not use a two story
comp with only above grade finished space). So, while the Appraiser keeps
slicing apples, but the Real Estate agent has been peeling oranges, just
think of it as two different cooks mixing up the same fruit salad—it all
fits in the same sized bowl.
About the author: John C.
Williams operates his business, WNC.RE.Source, Inc. in the Asheville,
NC area of western North Carolina. John is a licensed Appraiser, Home
Inspector, Real Estate Broker, and General contractor. He can be reached at
828.628.2727 or firstname.lastname@example.org
on Square Footage "How To" Calculations