Appraising: Apples to Apples

Written by Bill Waltenbaugh

I am sure everyone has heard the phrases “apples to apples” and “apples and oranges.” These are idioms used to describe similarities or differences. When it comes to valuing real estate, it’s essential that apple-to-apple comparisons be made. For this reason, a significant amount of effort is put toward defining and describing the square footage of a property.

Gross living area (GLA) is the calculation used when appraising single-family residential property. This shouldn’t be confused with gross building area (GBA), used for two- to four-family structures and commercial properties. To be clear, GLA is the topic that is covered in this article.

-Per the Appraisal Institute Dictionary of Real Estate Appraisal, GLA is the total area of finished, above-grade residential space, excluding unheated areas such as porches and balconies.

-HUD expands on this definition with the following: “Gross Living Area (GLA) is the total area of finished, above-grade residential space. It is calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space. Finished basements and unfinished attic areas are not included in total gross living area. The appraiser must match the measurement techniques used for the subject to the comparable sales. It is important to apply this measurement technique and report the building dimensions consistently because failure to do so can impair the quality of the appraisal report.”

-The Fannie Mae Selling Guide goes even further, stating, “A level is considered below-grade if any portion of it is below-grade—regardless of the quality of its finish or the window area of any room.”

In short, to be counted as part of the GLA, the finished space needs to be heated and located entirely above grade. It doesn’t matter if the area includes a walkout or is located mostly above grade. In November 2003 the American National Standard Institute (ANSI) published a 16-page document that provides even more guidance regarding the method for calculating GLA. This document, known by many in the industry as the ANSI Standard, can be purchased and downloaded for $10 at homeinnovation.com/about/bookstore.

Finished lower-level space may, however, add significant value to a property. These areas, often finished with the same quality as above-grade rooms, can add notable utility. This below-grade area needs to be calculated and adjusted for separately from the GLA. The main reason for the differentiation has to do with the potential for an inconsistency in quality in these areas. For example, two homes constructed by the same builder may be identical in their above-grade quality, but the finish in the basement can differ significantly. After purchase, one owner may have this area finished by professionals with high-quality materials, whereas the other is finished with less skilled labor using lower-quality materials. Although the homes are very similar above grade, it is not an accurate comparison if the lower levels of these homes are included in the GLA and adjusted at the same rate. Separating this area from the above-grade square footage makes it easier to account for these differences.

Like anything else in valuation, there are always exceptions to the rule. For example, a berm-style or underground home can’t be reported as zero rooms, zero bedrooms and zero bathrooms with a GLA of zero. I’ve also seen homes with only a small area above grade. An A-frame design that is mostly below grade with only a small loft area above grade can’t accurately be compared to the market if the GLA reported is the small loft area. As such, Fannie Mae provides the following guidance for these unique circumstances:

“Appraisers may deviate from this approach if the style of the subject property or any of the comparables does not lend itself to such comparisons. However, in such instances, the appraiser must explain the reason for the deviation and clearly describe the comparisons that were made.”

Another challenge when determining GLA has to do with large enclosed areas that are finished and heated but are limited in overall utility with respect to market expectations. For example, enclosed areas that house in-ground pools can, in some cases, double the size of a property. However, it isn’t accurate to compare a home with 1,000 square feet of traditional living area and 1,000 square feet of enclosed pool area with a home that has 2,000 square feet of traditional living area. The latter would have a larger kitchen, larger living room, larger bedrooms and may even have additional rooms, such as a family room. This type of home attracts a different market segment and is not a good representation of the typical buyer of the home with the enclosed pool. In this case, it is better to exclude the square footage of the enclosed pool, find comparable properties that are similar to the traditional GLA and make separate adjustments for the added value of the enclosed pool area.

Similar concerns can arise with properties that have accessory dwelling units (ADUs). Unless all of the comparable properties also have ADUs, comparing similar-sized properties—one without an ADU and one that includes the square footage of an ADU in its GLA—can be misleading. In other words, the primary living areas of these properties are going to be much larger than the primary living area of the properties with the ADU. In these cases, it is better to exclude the ADU square footage from the GLA and adjust for it separately like any other accessory, such as an outbuilding or pool.

At the end of the day, consistency is the best policy. Whichever method or calculation used, it is most important to ensure an apples-to-apples comparison is made.