Happy New Year everyone and sorry my blogging has not been consistent of late. For appraisers, particularly those in the Portland area, last year was an incredibly busy year. Fees for appraisals went up by 50% or more in Portland. This was a shock to home buyers and others looking for appraisal services, but it represented the first raise for appraisers since the 1990s. Finally, fees in Portland are at a place where appraisers can attract fresh talent into an aging industry. Let’s hope that these gains do not disappear in the next real estate slump, leaving appraisers looking for other ways to earn a living.
Speaking of other ways to make a living, many of my blog subscribers know that our company, A Quality Appraisal, LLC maintains a home measurement service, in addition to our appraisal business, that provides square footage estimates independent of an appraisal. Many appraisers also provide similar side services.
This last year was eventful for our home measurement business. Luckily, after a little research and not a claim or problem, we found that most appraiser Errors and Omissions (E&O) insurance providers do not cover appraisers when they are doing a measurement that is not part of the development of an opinion of value.
I was shocked when told this by one of the largest appraiser E&O providers because most appraiser E&O policies claim to protect customary professional services performed in the insured capacity as a real estate appraiser, and that many of the services appraisers can provide do not involve an opinion of value. How much more customary of a service is a measurement when almost all appraisers measure homes on almost every appraisal assignment?
After I pushed back against the E&O provider, a senior underwriter of the company responded that it would come down to the definition of appraiser as described by the insurance policy, and that they would need to decide if the measurement service was “usually and customarily rendered by a real estate appraiser.” The underwriter explained that square footage estimates are not unique to the appraisal industry and non-appraisers can provide them. Coverage would only be triggered if an appraisal report underlies the square footage estimate.
The senior underwriter went on to explain that when a real estate agent or broker asks an appraiser for a measurement, it is because they seek to shift liability to the appraiser. The senior underwriter also said that measurements are considered risky by insurance companies and added that “about 50% of claims presented to our company involve sq. ft. issues.” This was contrary to what I believed was true — that measurements are only a small piece of the appraisal liability and are easily verifiable. I knew if we wanted to keep our measurement customers, we needed to fix this problem.
To solve it, we contacted all companies that we could find in the US that are exclusively measurement businesses and asked where they secure E&O insurance. After chasing down numerous leads and talking to many insurance providers, we found that most home measurement businesses think they are covered through architectural or real estate policies. However, like appraisal E&O policies, when we contacted the insurance companies, we found out that measurement services are not actually covered.
For this reason, we sought legal advice. Thus, A Quality Measurement was split into its own business name and website, separate of A Quality Appraisal, LLC. After committing many dollars and countless hours, we believe that we have resolved our specific insurance and liability problems. We are not offering legal advice here, nor can we provide the plan our attorney put in place specific for our business. I merely suggest that if you are an appraiser doing home measurements, contact your E&O provider first to see if you are covered.
Are you an appraiser who does home measurements? We would love to hear from you.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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Thanks for reading,
Gary F. Kristensen, SRA, IFA, AGA
One small part of what real estate appraisers do is measure homes to calculate the living area or “square footage.” The standard that is typically used by most home appraisers to measure and calculate living area is provided by ANSI (American National Standard Institute). However, in this post I’m focusing on the geometry and simple math of determining the total area.
Normally, appraisers draw homes using software that automatically calculates the area. Our company recently measured a home of an engineer by using just such software. After examining the computer generated home sketch, the engineer said that the upper level of his home (shown in the illustration above) had been incorrectly calculated. He then provided his handwritten calculations as support.
When I heard this, my stomach knotted up and I thought, “Did this engineer find a bug in our software?” A Quality Appraisal associates measure many homes each year all around the Portland area. I thought, “Is this an isolated bug or something that could have caused errors in hundreds of appraisals or measurements?” We don’t manually check the calculations of the software on all of our measurements before they are delivered to a client. Maybe we should.
I could not wait to get back to my office and check for myself. Once in the office, I deconstructed the drawing into five smaller shapes (a composite figure and some appraiser software will do this automatically) and then I was able to easily calculate the area as shown in the figure above. To my relief, I came up with exactly the same number as the software total for the upper level. After this experience, I concluded it is good practice for appraisers to occasionally check the calculations totaled by our sketching software. For more information on how to deconstruct a composite figure and add up the individual areas, here is a short helpful video from Mathtrain.TV.
Lately I have been writing about appraiser home measurement and floor plan sketching services (some Portland, OR agents call it “Room Service”). This week’s blog shares one example of a recently measured property that had had a significant discrepancy between the county records and actual measurements.
The above illustration shows my floor plan measurement on the left and the county records on the right, as well as a table comparing the two on the far right. By looking at the floor plans closely, you will note some important differences. First, the entire home is about four feet wider than the county records show. This is most evident when comparing the wall between the finished area of the house and the garage. Another significant difference is that the county shows the wrong location for one of the turrets on the second floor. These variations, and other smaller discrepancies, result in the county having 275 fewer square feet on record for this property.
What could have caused the disagreement between appraiser measurements and the county? I can only speculate in the case of this property. It is quite possible that the county used plans submitted at the time of construction for the living area calculation, and that the owner or builder made modifications to the plans after obtaining permits. Because of this experience, and many other similar ones, I have learned to always double check critical data regardless of the source.
You are getting ready to list your home for sale and the real estate agent suggests that you have a floor plan measurement sketch done by an appraiser. Some real estate appraisers and agents in Portland, Oregon call floor plans “Room Service.” Floor plans are a great idea to assist in marketing your property attractively and accurately. A diagram helps buyers visualize the layout of the house before they visit it.
When an appraiser measures a home in Portland, most often the measurements turn out to be slightly larger than county records show. However, in this example, the appraiser spends over an hour at your property and produces a beautiful drawing, but the measurements are smaller than those that are recorded by the county or other sources. What should you do?
Understand that it is better to advertise the correct square footage. Listing the property with overstated measurements could increase liability, cause a frustratingly low appraisal, result in a failed sale, or lead to increased buyer negotiating leverage.
Put it in perspective. By how much is the square footage smaller? Many buyers will not even recognize a loss of only 50 or 100 square feet. Small variations in measurements from one appraiser to the next are common and are usually insignificant, often resulting from rounding.
If you think that the appraiser has made an error, use the floor plan sketch to go around the house and individually check the measurements. Remember that areas are typically measured from the outside. In addition, stairs are included in all levels but finished areas less than five feet in ceiling height (common under the roof slope in attics) are not (when using ANSI). I recommend checking to see if things make sense. For example, if you know that the second floor occupies the same footprint as the main floor, check to see that those measurements are the same on both floors.
In February I wrote a blog post about the value of our Portland appraiser home measurement service and how it can increase the sales price of a home, reduce liability for the agent, and reduce problems at closing. Since that post, response for the service has been overwhelming and we have been receiving feedback on the product. Based on customer demand, we offer our clients home measurement service with or without floorplan depiction of interior walls as shown in the image above.
The basic home measurement service focuses on providing just the information that agents need when entering accurate data in the RMLS. This includes the total living area for each level of the home and the room dimensions. However, we find that including the floorplan layout of interior walls makes listing packets look even more attractive. As a result, floorplan measurement with interior walls has become our most popular product.