Square footage is the most common driver of a comparables approach to market valuation of real estate. For example #SF x average comparable sale price per square foot = market value assessment. There are other methods of valuation, but this is most common. It's also laden with complexity.

The Houston MLS system not only requires a SF numerical input, but it also requires that the source of the square footage be cited. In the system, there is a drop down box for agents and brokers that only gives us four options for source citation: Appraisal, Appraisal District, Builder, or Seller. The MLS system also automatically inputs the Appraisal District number when a new listing is initiated, which is the most commonly used source, but we can override that number and if we do, we have to select another source from the drop down menu. Each SF number requires a source citation, and the Appraisal District is public record and is what taxes are based on obviously. It is also by far the most commonly cited source.

With “Appraisal” as the source (not Appraisal District), it refers to a private appraisal with a licensed appraiser’s measurement of the home, which is a precise method, however no two appraisers, careful as they might be, will arrive at the same number – there’s always some variance. We have had sellers who had about 200-500 SF more on a private appraisal they had done when they refinanced in the past than the Appraisal District number, and those clients chose to advertise the private Appraisal report number.

In one case, when the buyer’s lender’s licensed appraiser measured the home, his measurement of the home came in only 10 SF more than the appraisal district, but approximately 200 SF less than the prior refi appraiser's measurement. This variable alone caused the property to appraise lower than the contract value, which kills most loans in underwriting, even though the price per square foot used by the appraiser was higher than anticipated. Fewer square feet = less to multiply the $/SF by. The buyer’s loan underwriter will most always not approve a loan for a home that their licensed appraiser values less than the contract price. These are all things beyond our control as real estate brokers. In the end, if the buyer cannot obtain a loan due to the buyer’s lender’s appraisal coming in under the contract price, the loan is rejected unless the contract is amended to the appraised price. And if the loan is denied because of the lender’s appraisal, then under the standard Texas contract terms, the buyer can terminate the contract and receive their earnest money back. Bad news all around.

So each seller should be aware of both the options and implications of the square footage and source cited for their property. Despite SF being a number, there is no “correct” number on a practical basis because every source and every method will vary, even if only slightly, sometimes significantly. Even a builder’s plans can sometimes not match up with a measurement of a particular home because of the construction methods used that can result in a degree of variance.

It’s not uncommon to see 1% to 10% (on the very high side) variances between sources on any single property.

But it’s also very important to note that every standard resale purchase contract in Texas only refers to the legal description of a property (i.e., “Lot #, Block #, Legal Subdivision name, Section #”) and not any mention of SF. Often same with commercial real estate. SF comes into play when the appraiser for the buyer’s lender uses it in a comparables analysis to assess the market value of a property for the purpose of loan underwriting, as referred to above.

In the end, when a buyer obtains a loan for the purchase of a property, their lender will send out a licensed appraiser to measure the home or structure according to standard practice under their license – the loan underwriter will not accept an outside source. Under new Real Estate Settlement Procedures Act ("RESPA") reforms enacted recently, appraisals are carrying a lot more weight with underwriters and are under a lot more scrutiny. The only time this wouldn’t come into play is if the buyer is paying cash, which is very rare, especially at today’s interest rates.

(On a side note, when “Seller” is cited as the source of a SF number in a listing, it is viewed with the most skepticism from buyers and agents, but it is an option especially if a seller has good evidence such as original plans for an add-on. The main issue with SF in a listing is one of “full disclosure” of source since SF varies according to source, so we cannot advertise the number without also citing the source. A broker cannot determine the square footage of a property. We can only input the client’s choice of SF according to the source they choose. Also, if an appraisal shows fewer SF than the listing presented but the value still matches or exceeds the contract price, that usually will pass underwriting.)