How much misrepresentation in RE advertising?

kaismomOctober 17, 2011

We are buying a duplex as an investment property. This is in a very hot, popular neighborhood with 20 to 30 year old professionals.

The place was advertised as a property with 1 parking, upon questioning, the agent, who is also the seller, said that the property did not have any parking. Less than 1/2 of the rentals in the area have parking. So no surprise.

The place was advertised as 1200 sq ft per unit. At the time of inspection after the offer, it was determined to be 958 sq ft. When I was looking at it, I thought it was on the smallish side for 1200sq ft. The sq ft in my mind was a gross misrepresentation since the sellers must have known what the sq ft was given that it was completely rebult in the past 3 years.

We are still buying the property for many other reasons but....

I guess this is why all RE advertising says that "buyer to verify the actual square footage..."

Is this common or typical occurrence in real estate advertising? Just curious. I often see misrepresentation regarding basement or finished sq footage, for example....

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I personally measure all of my listings. Here in NC, we are allowed to be +/- 5%.
Here in NC, the phrase "buyer must verify..." does not cut it. If an agent advertises a stat on a property, it had to have been verified by the listing agent.
I report agents periodically who do this nonsense. They are just lazy. I hate lazy.

    Bookmark   October 17, 2011 at 7:32AM
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The lazy shortcut is to just take the exterior dimensions and multiply them. eg 50 ft long by 20 ft wide = 1,000 sq ft. Of course, that is much less accurate that doing a room by room calculation. In a 1 story open-plan, single family home, you are only going to be off by the footprint of the walls. In a renovated duplex??? You probably have multiple chases, extra dividing walls etc eating up space and reducing the true living area substantially below what the outside footprint would indicate.

    Bookmark   October 17, 2011 at 9:00AM
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The tax authority normally uses the outside dimensions since that is what they have access to.
They are not going to measure room by room and add things up.

Purchasing by the square foot is pretty useless in anything but commercial RE, and even there the measurements often go wall-to-wall or wall-to-window.
Even when you cannot place furniture flush to either the wall or the window.

    Bookmark   October 17, 2011 at 11:49AM
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Many States have gone to one measuring standard, see below:

Here is a link that might be useful: ANSI Measuring Standard

    Bookmark   October 17, 2011 at 2:22PM
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Measurements are taken on the outside of a house, not the inside. Of course, you have to subtract out areas such as garage, two story or vaulted areas, areas under jack walls less than 5 feet tall...
OP, that is a 20% error. That is a huge mistake. I would have advised renegotiating the sales price once the mistake was discovered. You have lots of leverage now... the seller is the listing agent who just committed willful misrepresentation.

    Bookmark   October 17, 2011 at 2:24PM
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At this point, I would rather buy it at the price that we have negotiated than lose the property with further negotiation. We are at a price that is quite comfortable for our investment cap rate AND the fact that this is new building with very low maintenance cost for the next decade or so. Both of these factors are not seen in other properties that we have looked at.

The 'corrected' sq ft of the units are very similar to the units in the neighborhood and the rent is comparable.

We have been looking very seriously for the past 6 months and know that the property is a good one for OUR needs at a reasonable price...

I suppose it does leave a bit of bad taste in one's mouth when one sees that there was "willful misrepresentation"....

Interestingly enough, the central core of our city has typical invester cap rate of less than 5.5%. I am not that interested in properties that are farther out from the central core where the jobs are. The cap rate is somewhat higher further out from the city you go... Because the interest rate is so low now, the cap rate is low AND that's what the investment property priced at...

NC guy, what is the cap rate running in your neck of woods?

    Bookmark   October 17, 2011 at 5:50PM
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OP... glad to hear you got a good deal. You are right to not force the issue. I have to remind some of my investor clients to "Not trip over the pennies when trying to pick up the dollars"
For all interested... Cap Rate is calculated as Net Operating Income divided by the sales price. NOI is calculated as Net Rental Revenue less Operating Expenses.
Sales prices must be really high where you are buying... hence the very low cap rate of 5.5%. Here in Charlotte, it is closer to somewhere around 10%. It does matter what type of property one is buying too.
Other ways to judge your investment characteristics are values such as Cash on Cash Return, Debt Coverage Ratio, Occupancy Break Even Point, Payback Year Of Cash Down, and Internal Rate Of Return.
If you would like a spreadsheet on how to calculate these investing terms, just let me know.

    Bookmark   October 17, 2011 at 7:54PM
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Interesting stuff.

I never believe anything I read in the advertisements. I use them for guidance, try to read between the lines and guess what's actually true or not, and then I go by what I see when I get there.

    Bookmark   October 17, 2011 at 10:42PM
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NC RE guy,

10%. WOW is all I can say. However, Charlotte NC RE market has been hit hard from the banking crisis, if I am not mistaken. The high cap rate may have something to do with your local market which has tanked.

I am in Seattle, WA. Rent is high and the housing price is also high even after the crash. It is an affluent city with lots of young people. There is a lot of money chasing these investment properties.

I talked to an RE agent that has a client that is buying properties that are about 3 hours from Seattle. These properties are running a cap rate of 15 to 20%. Unfortunately, we are not interested in that type of property or management! No can do! These properties are much higher risk in terms of location and tenants. I am not that interested in high risk investment.

We were looking at a GORGEOUS quadplex at a HOT location a few months ago and it finally sold at about 6% cap rate to someone braver than us. The reason we did not pursue it was the maintenance. It was an absolutely stunning 100 year old building with old world charm intact that got high end rent in a prime area for young people. I saw HUGE painting bills coming at us every 10 years! We like low maintenance....

For us, RE investment is to diversify. It is not our core investment. We are accidental RE investers because our RE has done better than other things in the past and the tax advantage that it gives us is HUGE.... Because the way the taxes are structured, it is hard to divert money out of RE and not pay HUGE sums of tax and there is a huge tax advantage to keep money in RE.... So here we are....

    Bookmark   October 18, 2011 at 8:24PM
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Actually, the fact that Wells Fargo and BOfA are located here has nothing to do with our current market. They are both still here. If one fails, then it will make an impact. Charlotte never saw the double digit appreciation year after year like many places did. So we did not crash as hard as those places.

    Bookmark   October 19, 2011 at 7:56AM
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