Now that you know why a home’s accurate square footage is important, it’s time to exploit the inconsistencies and make some money! Buying a home with the wrong marketed square footage can bring about gains.
Every home buyer is a real estate investor, whether they know it or not. I always encourage homebuyers to buy a home for lifestyle first and profits second. However, this doesn’t mean we shouldn’t focus on the financial returns as well.
The main reason why I’m writing this post is because I’ve discovered an opportunity to make up to $260,000 due to a lack of attention to detail by a real estate listing agent.
A bad listing agent can cost sellers a fortune. On the other hand, a great listing agent and a savvy buyer who pays attention to detail, can make a fortune.
How To Profit On Homes With Incorrect Square Footage
The opportunity to find anomalies is one of the reasons why I prefer investing in real estate over stocks. With enough prospecting, not only can you find deals, but you can also use soft negotiating tactics to save even further. With stocks, there’s no such opportunity to affect the share price.
Here’s a basic framework on how to profit on homes with incorrect square footage. Once you see exploitable inconsistencies when investing in real estate, it’s worth pressing.
Official square footage refers to what square footage is recorded on the tax records from the assessors office.
The vast majority of homes have marketed square footage that is equal-to-or-higher than the official county assessor’s office square footage data. Your goal is to look for the opposite.
Why would a home have a lower marketed square footage than the county assessors office data?
Chances are high it’s due to negligence, carelessness, and/or ignorance by the listing agent and seller. Even the Department Of Building Inspection signs off on inconsistent floorpans all the time. Chances are low it’s due to an honest more recent lower square footage measurement.
As a seller, there are plenty of reasons why you might have missed the square footage discrepancy. Because you are busy with other matters, you may have entrusted your listing agent to handle everything. Therefore, you were unaware of this important inconsistency. However, details matter!
The listing agent may have used the figures on the architectural drawings of the latest remodel. If the remodel had been passed by inspectors, the listing agent would have no reason not to trust the architect’s square footage.
However, the listing agent also needs to then compare the architect’s or appraiser’s square footage measurements with the square footage at the county’s assessor’s office. If the latest measurements are much lower (10%+), then a remeasurement is in order. With such a big discrepancy in square footage, chances are high an error was made.
2) Buyers must do their due diligence
The greater the square footage discrepancy, the greater the potential profit for the home buyer. Hence, your task is to compare the marketed square footage with the county assessor’s recorded square footage on as many attractive homes as possible. Every city has an Office Of The Asessor-Recorder website to go to. Here is San Francisco’s.
In general, the larger the house, the harder it is to feel/notice the square footage discrepancy when you’re walking around inside the house. If you want to make the most money on a house based on square footage discrepancy, then find the largest home you can find.
$2 Million Potential Profit Example On A Home With Wrong Square Footage
For example, let’s say you walk into a marketed 10,000-square-foot mansion with ten bedrooms and eight bathrooms. Most people cannot tell the difference between 9,000 sqft, 10,000 sqft, and 11,000 sqft. In other words, there’s potentially a plus or minus 10% square footage buffer that most people cannot notice.
If the home is marketed as 9,000 square feet, but it’s officially 10,000 square feet with the county, then you’ve got yourself a 1,000 square feet advantage. If the average selling price / sqft in the neighborhood is $2,000, you’ve theoretically got up to a $2 million profit (1,000 X $2,000)!
Accurate Measurements For Small Properties Matter Too
On the other hand, let’s say you walk into a marketed 1,000 square foot, two bedroom, one bathroom house. Given the much smaller square footage, most people can tell the difference between 900 sqft, 1,000 sqft, and 1,100 sqft. For example, when space is more limited, a 900 sqft home that is 10% smaller than advertised, can feel quite different.
However, even with only a 100 sqft advantage, where the marketed square footage is only 900 versus 1,000 sqft officially, you will still profit. Let’s say the average selling price / sqft in the neighborhood is $500. You’ve now made up to $50,000 in instant home equity if you buy.
3) Get into contract and buy the house after everything checks out
The final step to making money from a home square footage discrepancy is to buy the house.
You must measure the home yourself and get an appraiser to do the measurements before buying. Once you’ve verified the home’s livable square footage is more than the marketed square footage, go through all the other contingencies and buy.
If you ever want to sell the house, you can simply list the house’s larger square footage based on what the county assessor’s office has. Then you can provide documents in the seller’s disclosures of the floorplan and square footage by the independent appraiser or architect if remodeling was done.
It’s not your fault the previous sellers marketed a square footage that was lower than reality. You did your due diligence, just as your new buyer should due their own due diligence in measuring the square footage based on the ‘caveat emptor” rule.
A Square Footage Discrepancy Is A Bonus, Not A Main Reason
Finding a square footage discrepancy isn’t the main reason to buy a home. The main reason to buy a home is because you found a home at an affordable price that will improve the quality of your life. You’ve walked around the grounds and feel like the size of the house is worth the price.
You should follow a home buying guide like my 30/30/3-5 rule to ensure you don’t overextend yourself. In addition, you should analyze the housing market and make projections about your financial health and the future health of the economy.
Buying a home that has more square footage than advertised is a bonus. If you succeed, you will feel like you got a deal. If home prices go down after your purchase, you may also have a buffer.
Many people buy a house based on how it makes them feel. But as a savvy Financial Samurai, I want you to also look for opportunities based on discrepancies. These things are not mutually exclusive!
Why Some Homes Don’t List Square Footage
Listing a home’s square footage on the MLS is the common thing to do. But some real estate agents don’t like to do so because it invites scrutiny, especially if a house has a lot of unpermitted space that could pass off as livable space.
Even if a seller discloses where the square footage comes from and emphasizes caveat emptor, there will sometimes be potential buyers who will still feel misled by a square footage discrepancy, even after signing off on the disclosures.
You can imagine a situation where at the final stages of closing, a buyer writes a price concession letter asking for a discount in order to close. After 60 days in contract, a seller might just capitulate instead of starting the whole process over again.
Heck, I wrote a price concession letter on my existing house just because I was getting cold feet! It was July 2020 and we were still experiencing pandemic restrictions. I wanted to pay a lower price to feel even more comfortable. The seller’s didn’t budge, but instead, had their lawyer send a letter to force me to proceed.
More More Money On Homes Due To Size Discrepancies
Selling a home is a stressful process, much more so than buying a home. Hence, the more transparent a seller can be up front about a home’s issues, the better. If a seller finds a buyer who accepts the home after all the disclosures, then the seller will feel more confident their home will actually be sold.
If you are a buyer, I hope this article has helped you find a new way to buy with confidence. With so much money at stake, there is often a psychological hurdle buyers must overcome before buying a home.
In a bull market, a buyer must overcome their real FOMO. In a bear market, a buyer must overcome their fear housing prices will continue declining after purchase. When it comes to buying a home, there is no downside to doing more due diligence.
If you are a seller, I hope this article protects you from mispricing your home due to an inexperienced real estate agent. Proper pricing can make or break deals.
Pay attention to the details! If you do more than your counterpart, you could make a lot more money.
Reader Questions And Suggestions
Have you ever found discrepancies in the marketed square footage of a home versus the actual square footage based on tax records? If so, what was the reason for the discrepancy? Why don’t more sellers, buyers, and real estate agents pay attention to these details when so much money is at stake?
To invest in private real estate, take a look at Fundrise, my favorite private real estate investing platform. Fundrise was founded in 2012 and focuses on single-family and multi-family properties in the Sunbelt, where valuations are lower and cap rates are higher. Sign up and see what they have to offer.
For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.