If you’ve just received an appraisal report for a refinance or purchase transaction, you might be wondering how the appraiser came up with the square footage adjustment. Or, if you’re just starting out as an appraiser, you might be wondering how to make adjustments in the first place.

While we can’t speak for everyone, this article will give you a general idea of how to go about it. We’ll even include some free resources (our Square Footage Adjustment Calculator) for you to try out on your next report.

In short, there are four basic approaches:

1. General Range
2. Matched Pairs
3. Grouped Data
4. Cost Analysis

1. General Range

An appraiser already has a general idea of the square footage adjustment that’s appropriate for your area.

Appraisers are state-certified experts for the region in which they’re practicing. In order to become an appraiser, a person has to apprentice under another appraiser for 1,500 hours for at least one year, take anywhere from 150-300 hours of focused coursework, and pass the Certified Residential Appraiser exam, a fairly grueling 4-hour test with a 40-50% fail rate. They’ve crunched the numbers on hundreds of properties similar to yours.

In northeast Ohio, for example, that number usually (but certainly not always) boils down to somewhere in these general ranges:

• 0-$150,000: $15-$50 per square foot
• $150,000-$250,000: $30-$60 per square foot
• $250,000-$350,000: $40-$80 per square foot
• $350,000-$550,000: $50-$100 per square foot
• $550k+: $100+ per square foot

These numbers are not set in stone. They are a general range to start with. In order to come up with the actual adjustment, it needs to be based on market data. Market data might suggest that the square footage adjustment needs to be outside of the listed ranges. That’s okay, and it’s to be expected. These numbers might be applicable for some markets in the Midwest, where the average sales price is around $200-300k, but they might be completely baseless for properties in Southern California.

Even though they shouldn’t, some appraisers stop here.

They decide to pull a number out of thin air using a general range, and so their adjustment is completely unsupported by any actual market data. If they ever get pulled in front of the state board to defend their adjustments, they could get into a lot of trouble.

Pros of Using a General Range

• Simple, back-of-the-napkin solution.
• Good for realtors adjusting their CMAs.
• Can give you a good idea of whether or not a property is actually comparable before diving into other adjustments.
• Gives laypeople a general idea of the value of additional square footage (adding additional square footage to a $90k home isn’t going to add $500/sf of value most of the time).

Cons of Using a General Range

• Can, very simply, be outright wrong. If it isn’t based on actual market data, it’s essentially a number pulled out of a hat.
• Is indefensible to the state board.
• Can get you trapped in a cycle of laziness, where your adjustments aren’t based on anything other than intuition.

2. Matched Pair Analysis

Matched pairs are one way of bullet-proofing your square footage adjustments so that they’re actually supported by something concrete. Matched pair analysis involves looking at two similar properties and isolating a differing variable to figure out how much it’s worth.

For example, imagine you have two comparable sales. One is a 1440 square foot Colonial home that sold for $250,000. The other is a house next door that is similar in every way, except it’s 1640 square feet and it sold for $260,000.

First, find the difference in the variable that you’re looking to isolate. In this case, that variable is square footage. Luckily, you don’t have to make any other adjustments to isolate this variable since it’s similar to the house next door in every way.

Divide the Difference in Price By the Difference in Square Footage

1640 square feet – 1440 square feet = 200 square feet

Next, find the difference in price…

$260,000 – $250,000 = $10,000

Finally, divide the price difference by the variable…

$10,000 / 200 square feet = $50/sf

Seems easy, clean, and simple, right? Unfortunately, the only place that you’ll find two comparable sales this simple is in a textbook. In real life, adjustments are much messier.

Every once in a while, in fact, you’ll find two similar comparable properties with the numbers reversed from what we saw above: The bigger one actually sold for less than the smaller one — even for arm’s length transactions that have been adjusted for market conditions and other variables. Why? Maybe a realtor did a fantastic job of marketing and negotiating one of the sales. Maybe the “Efficient Market Hypothesis” of the real estate industry failed us this time.

Either way, if you’re an appraiser, use your common sense and don’t adjust negatively for additional features. It’s possible that some features, because of their cost to maintain, actually do detract from value, like in-ground pools in a neighborhood where that feature is uncommon. However, an additional bathroom, bedroom, and/or family room shouldn’t result in a negative adjustment.

If you already have your comps lined up, you can try our Square Footage Adjustment Calculator. It will do all of the calculations for you to determine a matched pair that’s reflective of your square footage adjustment.

Pros of Using Matched Pair Analysis

• Can bullet-proof your adjustments using actual data.
• Are fairly simple and straightforward.
• Sometimes easy to do using the comparables you’ve already selected.

Cons of Using Matched Pair Analysis

• Your sample size is only two comparables. Those comps may or may not reflect the overall market, but it isn’t hard to cherry-pick data to support a preconceived notion of what you think the square footage adjustment should be rather than doing a deep dive into actual statistically significant market data.
• Sometimes leads to wonky conclusions.
• No two properties are ever identical.

3. Grouped Data Analysis

Group pairs are a step up from matched pairs, so they offer much stronger evidence for making adjustments. Instead of using just two comparable sales to find the appropriate adjustment, you can look at all similar properties in the neighborhood, group them together, and then compare them to another group of properties.

For example, after you’ve drawn your neighborhood boundaries, you can search for every property in the area that’s between a certain square footage. If necessary, adjust for other factors like age and total bed/bath count. After you have a few groups of this data, you can find out the approximate amount that a buyer is willing to pay in this market for additional square footage. If you’re looking at making a 200 square foot adjustment like the one we talked about above, you can find a group of properties between 1300-1400 square feet, 1400-1500 square feet, and 1500-1600 square feet:

So, the difference between the first group of data is $28,133 ($215,500 – $187,367) and 84 square feet (1440sf – 1356sf). That indicates buyers are willing to pay $334/sf (the difference of $28,133 divided by the difference of 84 square feet) — far outside of our established range. However, the first group of data is also much older than the second group (by ten years), and we haven’t adjusted for land values, either.

The difference between the second and third groups is $17,500 ($233,000 – $215,500) and 117sf (1557sf – 1440sf). That gives us a much more reasonable $149/sf. It’s still, however, far outside of what you would expect.

Narrowing It Down

After you’ve done that initial grouping, you can narrow down your groups to be more indicative of the overall market. In this case, I looked at some properties in the 1400-1500 and 1500-1600 group and found a pocket of 4-6 directly below Kent Rd but north of N River Rd (by Adell Durbin and Ron Marhofer Chevrolet) and found the following:

Here we have a $5,000 difference and roughly a 100sf difference, for a total adjustment of anywhere from $45-50. I eliminated one outlier from the 1400-1500 data, but this still gives us something that’s a bit more data-driven since it’s more than one matched pair.

Additionally, there are services like Spark and Solomon that assist you in doing more advanced analysis, like regression. This can help you separate the land value and improvements value so that you can more accurately determine the actual square footage adjustment.

Pros of Using Grouped Data

• More pairs, more authority. The more data to back up your adjustments, the better. You can prove that there’s a correlational relationship between the factors you’re looking at, and from there you can find an adjustment.
• Still fairly approachable and quick.
• If there’s a lot of market data, it’s very easy.
• Easiest to defend. You don’t have just one pair of comps that show this relationship, you have several.

Cons of Using Grouped Data

• Doesn’t necessarily reflect your comps. Market averages are just averages.
• Finding groups of comps might be difficult in some rural areas.
• A bit more time-consuming.
• One massive factor difference can throw it off. If the age is very different for one group, it can be difficult to adjust.

4. Cost Analysis

Some appraisers also use cost analysis, particularly when there’s no data available. If two homes are equal in all ways, the value of an additional bedroom is probably equal to the cost that it would take to build one.

However, this isn’t always the case. Market participants sometimes don’t recognize the value of certain features as being equal to their cost. In other words, just because someone paid $10,000 for something doesn’t mean it’s worth $10,000. In appraisal, this is called the Law of Contribution. An amenity is only worth as much as the typical buyer is willing to pay for it.

Final Thoughts: Square Footage Adjustments

Appraisers use a number of methods to determine square footage adjustments, and while I tend to lean toward group pairs, no one method is better than any other. In fact, using only one method can lead you to determine adjustments that just don’t make any sense.

It’s unlikely, for example, that a buyer is willing to pay just as much for additional square footage than the actual existing price per square foot. In other words, if a square footage adjustment is $140/sf (or higher) and the actual price per square foot of the property is $140/sf, that means that the appraiser is saying 100% of the value of the property is in the square footage. This is almost never the case.

The land has value, the existing improvements have value, and any additional square footage will only be a fraction of the current price per square foot. While it would be nice to build a 10×10 room and have the market pay an extra $14,000 for it, that’s very, very uncommon.

However, some of these approaches may suggest a square footage adjustment that’s in the ballpark of 100% (or more) of the price per square foot. In those cases, even though you used market data to derive adjustments, you can be even more wrong than the lazy appraiser who picked a number out of a hat.

In conclusion, it’s important to make sure that your adjustments 1) make sense and 2) are based on actual market data and not just intuition.