Basement Homes and Appraised Values Gone Wrong
95% of Appraisals on Homes with Basement or Lower Levels Have Errors, Errors that Affect the Home’s Value…
In the majority of markets all across the country, it is virtually impossible to get an accurate appraisal on homes that have a basement or lower levels. That’s a pretty big claim. Can it possibly be true? Absolutely it can! And, it happens every day. No one in the real estate industry wants to bring this topic out in the open for fear the public would be outraged. Well, it’s time somebody gets mad. And for all the Realtor’s® big talk about consumer protection, the real estate industry (Realtors® in particular) are doing a poor job in the real property information department.
Why are basement homes different from the rest? Fair question. It comes down to the information appraiser’s use in their reports to compare properties. Where do they get their information? From Realtors® and the MLS. And, after studying this topic for over ten years now, I can say with great assurance that the MLS is filled with information that is just plain wrong. There’s no easy way to say that, but the appraisal industry should have been shouting this for years. This is not a new problem. I have personally contacted numerous people in the Realtor® organization, from my local association all the way up to the president of the National Association of Realtors®; all without acknowledgement. They appear to think square footage and lower levels is a topic best left under the radar.
Most agents don’t understand how appraisers report square footage, or how they value homes with lower levels. There is more confusion over this topic than just about any other. If the agents don’t understand the way the federally mandated appraisal forms work, how in the world can the public understand them? Appraisers are required (by law) to report finished living area as above and below grade. When they look to the MLS for this data today, it is not a priority for most MLS systems. And accuracy is almost never discussed. It is a field rarely enforced, even by the associations that do require the separation. Many MLS systems don’t report sqft details at all. And, there are many MLS systems that simply copy and paste this info from the local tax department. Appraisers depend on the MLS for the majority of the data. They use it every day to create home values, but MLS systems are filled with this tax data and it is a trend getting bigger instead of declining. That leaves appraisers relying on the local tax department for basement sqft details and that cheats lenders and home buyers. A tax assessor never enters the house and any info is created from an exterior guesstimate of what is inside. Whether it’s finished, partially finished, unfinished space; if the washer and dryer are there, a storage space, a wet wall or two; or a brand new Rec Room and kitchen, and an area finished just like the upstairs. With a permit the info is better, but still not complete. And, without permits, it’s a hodge-podge on inaccurate data killing home values across the country.
95% of appraisals on basement homes have errors. Errors that affect the home’s value. Think about that. Sadly, it is NOT an exaggeration! For the tax department’s purposes the sqft information is accurate enough. They don’t need precise data. The real estate industry are the ones who need precise data, and they used to be the ones that provided it. That is until the internet exploded and agents got worried about liability. You would think for 6% commission, consumers would want their agent to measure their house and price it fairly. But, that’s just not the norm in todays’ real estate market. I keep shouting that the NAR® needs a national rule that a licensed appraiser (or other qualified expert) measures every house, before it is listed in MLS. The MLS, CMA’s and appraisals would improve dramatically overnight. This one change would improve appraisal quality by 50+ percent on this type of property and all property. It would improve mortgage security and protect unsuspecting consumers.
The MLS is flawed and broken. Today it is an advertising website, not an information source created by and exclusively for professional real estate agents. Appraisal quality cannot improve until the MLS improves. That simple. Realtors® control the information that controls the quality of every residential appraisal.
What needs to happen? The one new rule mandated by the national association requiring every home to be professionally measured. For now, homes with basements or lower levels continue to be filled with errors. Mistakes large enough that change home values. Buyers (and lenders) beware!