Measuring UP Square Footage - Is Regulation Needed?

Posted by urbandigs

Fri Mar 5th, 2010 08:39 AM

A: This is a topic I touched on a few times here, and is an old story that gets replayed every 10-12 months or so. Just how 'off' is Manhattan square footage? To be honest, its way off but I think this marketplace has evolved past the point of really caring anymore. Everybody knows that co-op apartment sizes are estimated and I rarely run into a broker anymore that actually quotes some odd total size. They'd be foolish to say something like that given that only condos have the marketable square footage clearly documented in the offering plan filed with the AG's office. Brokers learned, and as a result, so did the consumers that for co-ops the 'how large is this apartment?' question always comes with a roughly estimated number followed by a very clear disclaimer on accuracy! In this day and age, buyer's know they have to take matters into their own hands.

measure-manhattan-square-foot-nyc.jpgThe Real Deal discusses how the "Inexact science of square footage causing inaccurate appraisals, unhappy buyers":

"When it comes to square footage in New York City, it's the Wild West," Bill Staniford, the CEO of real estate data Web site PropertyShark. "It's measured in so many different ways."

And in the current downturn, the difficulty of determining square footage is contributing to a number of other problems, from low appraisals to ruined deals. Staniford, who constantly fields questions from brokers about inaccurate square footage data on file with the city, said using price-per-square-foot as a measure of value is "totally pointless."
I totally agree and is the main reason why I do NOT use price per square footage as the source for my client's property valuations - rather, I focus on same line comps or at the very worst find a similar bed/bath unit and make a simple size adjustment if the data exists; more on this below.

The market knows or at least learns very quickly, that marketable square footage is if anything skewed to the upside. Which brings up a very interesting question --> You know those quarterly market reports that we all spend so much time analyzing? How accurate could price per square foot trends really be if the marketed size for 70% of our housing stock is estimated? I guess over the long term one can argue that the trend filters out some of the noise of the inaccurate data.

Condo's are easy as the marketable square footage is stated in the offering plan; all but eliminating the question of size and making it foolish for the seller or broker to try to artificially inflate! But co-ops? Co-ops take up 70% or so of our housing stock and total size is not listed in the offering plan...and with every co-op sale is a buyer that attempts to value the target property in order to figure out how to bid. Therefore, how do we value or price these things if the listed size is off? Maybe we should start using the # of shares allocated to the unit as a price per share valuation tool? Maybe REBNY needs to implement some regulation on the sell-side that requires every new Co-op listing from a member firm to use an outsourced contracting agency to measure the floorplan/size accurately for marketing purposes?

The solution MUST encompass most of the market to be worthy - which is why I say that any regulation needs to come on the sell side and not the buy side. I recall being charged about $150 for a professional floorplan to be made by OLR Digital who physically sends someone to the apartment to measure up everything. Is this cost really breaking the bank? What if REBNY required all new listings to be properly measured prior to listing?

In a commission based industry where the brokers don't earn their cabbage until after the closing, the environment is set up to result in flaws and discrepancies for marketing. Why? Because the broker and the employing brokerage firm doesn't know if they will ever get paid on the sale. That's no excuse, I know. So, maybe REBNY needs to make the employer brokerage firm responsible for professional measurements without penalizing the agent's ad budget? Possible, but not likely in this world.

My main concerns of this topic are over individual co-op unit valuations and the quality of analytical data for the entire marketplace - if in fact the majority of estimated co-op square footage is artificially inflated. This lowers my confidence level in Price Per Square Foot data trends and calls into question how one may value a target property based on a different apartment line whose total size may have been inflated. Exactly what Bill Steniford talks about in The Real Deal article.

When I do a property valuation I always look for in-building comps in order of the following priority:

1) SAME LINE SALE w/ SAME FOOTPRINT - this is the first goal. If my buyer's target property is an 'A' line, then I look for similar 'A' line comparable sales in the same building to do an analysis on. If I find a recent 'A' line to compare to, I just double-check the floorplan to make sure the footprint of the two apartments are identical. This eliminates any flaws in only doing a PPSF breakdown where one of the properties being used may have had its size inflated. I have the same layout, the same line, the sale price and the sale date. Forget the price per square foot method - I'll make my own adjustments for market conditions, renovations, and floor premium or discounts.

2) SAME ROOMS/BEDS/BATHS - this is the second goal if I can't find a same line to compare the target property to. I always stay in the same building unless the data is non-existent for an analysis. If my client's target property is a 6/2/2.5 (the format of this is generally Rooms/Bedrooms/Bathrooms) apartment, then I look for different lines that may have these exact property features - all in an attempt to compare apples to apples. As you start changing apartment lines, you start changing layouts/views/exposures/natural sunlight/etc..and the valuation becomes slightly compromised and more difficult as the open market value of these types of features in this market are highly subjective on the buy side.

3) SAME BEDROOMS/BATHS - If I can't find the same r/b/b to compare to, I eliminate the ROOM part of that equation and look for a comparable in the building with similar Bedrooms & Bathrooms. If the size of the both apartments are provided and there is a gap between the two total sizes, I can account for that by taking the sale price per square foot of the SOLD property and multiply that by the gap in size to the TARGET property and add that total to the comparable being analyzed so I have an equal foundation to do an analysis on. Of course the major flaw in this method is whether the SOLD or TARGET property's square footage was artificially inflated. I'll provide an example:

TARGET PROPERTY --> Apt 14A is a 1,350sft, 5.5/2/2 apt, and is asking $1,595,000
SOLD PROPERTY (same building) --> Apt 6D was a 1,250sft, 5/2/2 apt, and sold for $1,350,000

There is a 100sft difference in the two properties, different property line, and an 8 floor difference. If you read my technique for Valuing Manhattan Property you will know that I don't do PPSF valuations and rather I will adjust the two properties to be of the same size if I can't find a similar line to compare to - after this size adjustment, I will do the following adjustments to complete the analysis:

a) market conditions
b) light/view/exposures of different lines (floor premium)
c) renovation differences

First lets get the SOLD property and the TARGET property of equal sizes by closing the gap using the PPSF of the comparable sale:

100sft x $1,080 = $108,000

Since the SOLD property closed for $1,080/sft and the TARGET property is listed as 100sft larger, lets ADD $108,000 to the sale price of 6D and then move on to the other adjustments:

$1,350,000 + $108,000 = $1,458,000 as a starting point

The hope is to avoid this 3rd option for a comps analysis and to use a similar line.

Back to the discussion. The problem is that this is a very solvable problem but I don't think the powers that be have the motivation or the will to put a proper resolution in place that may cost brokerage firms more money to adhere to. It's a man-eat-man world out there and Manhattan buyers learned to fend for themselves. Brokers out there MUST use caution when quoting the total size of co-ops and it might be worth that $150 to simply hire a professional floorplan from OLR to get the exact measurements before the new listing even hits the market.

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