Wednesday, August 27, 2008

Size Matters

Now that I've got your attention, I refer you to the following link, which came out today (Aug. 27, 08):
This article was extremely well timed for me as I just put an offer in for a client on a home which originally was built with 1705 sq. ft. While looking at the property in the MLS (Multiple Listing Service) I noticed that the property's listed square footage had increased 330 sq. ft. in 2005, which comported to an addition off the garage to the rear of the property. The initial issue I had with the "room addition" was that it didn't have any heating or air conditioning, so I decided to investigate the matter further (something called "due diligence" in investor's jargon). Please keep in mind, this property is an REO, and the bank is selling it AS-IS, so my client is "stuck" with what he buys, but might be able to sue me, my broker, the listing agent and his broker, or a property inspector in the future, if we miss these things.

I went to the local building and safety office and was not able to find ANY information on the property in question (PIQ), and then called the local assessor's office. I was helped by a very informative clerk, who let me know that permits had been pulled for the rear patio, the additional single car garage, a pole barn (since recycled by local bandits for the sheet metal), and a 330 sq. ft patio enclosure.

Aha! Now I had found the square footage. Unfortunately for the seller, and fortunately for my client there quite a difference between a "room addition" and a "patio enclosure." As a former building inspector and son of a general contractor working on my on GC license, I know the difference. A room addition is considered "livable space" due to the nature of it's construction, a patio enclosure is not, and is roughly worth half of what a room addition is worth on a per square foot basis for a number of reasons.

Starting from the ground up, here are the differences between the two, and hence the reason a room addition is more valuable then a patio enclosure.
1. A room addition is required to be structurally tied into the footings of the building and a patio enclosure only requires footings under the patio posts. Generally, a footing is a trench 12" deep by 12" wide with two 1/2" pieces of rebar placed near the center of the trench--1 about 3" from the bottom and 1 about 3" from the top. The rebar is generally dowelled into the existing footing of the house and this gives a continuous base to the house. In many areas a footing of this size will allow for a 2nd story, whereas a pad footing under a patio post would not.
2. Within the framing of a patio enclosure, there is no requirement for insulation in the walls or the ceiling. A room addition must comply with the standards for the house, and in the state of California, for additions larger than 100 sq. ft. must have a Title 24 document submitted with the plans for the addition for energy efficiency requirements. The PIQ is in climate zone 14, in the high desert, which is one of the harshest zones in the state, because the temperature range is over 100 degrees fahrenheit (8 in winter to nearly 120 in summer). As this was done as a patio enclosure, my client and I can't know what the R-value of the insulation is, if any, without opening the walls, and if I my client wants to upgrade to a room addition, he will have to open the walls, and probably upgrade any insulation that was originally installed in 1991 (probably R-7 or R-11) with whatever is required by his new Title 24 document (R-13 minimum possibly R-15), and then, of course, replace the drywall, re-texture, and repaint.
3. Speaking of drywall, most jurisdictions in California require 5/8" fiberglass reinforced drywall (type x) between the garage and "living spaces". As this was originally built as a patio, that was probably not done, and the insulation is not likely installed between the garage and the patio enclosure as it would not be required, like it would have been for a room addition.
4. Electrical is not required on a patio enclosure. The National Electrical Code requirement for livable spaces is "no place on a wall that is further than 6' from an outlet...excepting closet interiors" (so basically a receptacle every 12' along the walls) and a requirement for a light or a switched receptacle, that a light can then be plugged into. This patio had the light, but I don't believe it met the receptacle spacing requirements, though, to be honest, I didn't measure them, I was just "eyeballing" it.
5. Livable space must have thermostatically controlled heating, whereas, a patio has no such requirement. Strangely, as of this writing, there is no requirement for air conditioning in the desert. However, if my client tied into the existing central air, that would need to be addressed in the Title 24 of his plans or he could add a heater to the room, but that would leave him without air conditioning. The size of the room might require a larger hvac system as the old system may not be able to handle the extra volume (330 sq. ft with 8' ceilings is 2640 cubic ft.--roughly 20% additional load). California has additional requirements for heating and air systems (including duct leakage testing) that I won't go into here, but add to the cost of installing them.
6. Depending on the jurisdiction, some of the above requirements might be waived, but with the current slowdown in new home building, the building inspectors have more time to catch the defects, and my client would still need to pay to have plans drawn, submit the plans and energy compliance documents (Title 24), install the footing, add any necessary electrical and hvac, and ensure proper insulation and drywall installation, then texture and paint, and finally add flooring, if he wants to be able to legitimately claim the additional 330 sq. ft. when he goes to resell the home.

It could run from $6000 (if my client is willing and can do the repairs and doesn't extend the central heating/air--which would be silly in the desert) to $24000 if he has to hire a contractor to complete the work. I feel $15000 is a reasonable figure and reduced the offer on the listing sales price by a little more than that for a couple of other deficiencies in the property--like exterior paint, dilapidated fence, missing gate, and broken tiles in the kitchen and hallway.

So, if you're buying an REO or any other property AS-IS, size matters, especially as it helps determine price per sq. ft. (ppsf in future posts), but you need to know if the square footage indicated is truly livable space, or you could be paying more for a property than you should.

If you are in need of a house, for yourself or as an investment, please email me. I have over 11 years of real estate investing experience (mostly rehabs) and up to date experience with California energy requirements, as I was a city building inspector from 2006-2008. I would be happy to assist you in buying or selling your home. If you have questions on how to upgrade your home for the best return on your investment, I can help with that too.

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