As part of any standard mortgage refinance, the lender requires a home appraisal. The lender wants to ensure the homeowner has enough equity to make a new loan. The amount of equity a homeowner is required to have for a refinance is usually 20% or more.
The cost for the home appraisal is generally between $500 – 800 to cover the appraiser’s time inspecting the house, taking pictures, drawing a layout, measuring the square footage, and doing a valuation analysis based on comparables and rebuild costs.
My appraiser spent about 40 minutes getting all the information he needed before telling me he’d get back to me in about a week with the results. While he gathered the information, I asked him questions about the health of the real estate market, how busy he was, and what the city records reflected as my home’s official square footage.
He said he was really busy and the market seems to be doing well. He then told me something I was surprised to hear. He said the city has my home recorded at only 1,720 square feet on the 3R report (Report Of Residential Building Record), or at least 200 square feet smaller than its actual square footage.
Never Update Your City Property Records
I was annoyed the city had not updated my home’s official square footage after my home expansion in 2015. After all, I had paid the city a permit fee to legally knock down an old bathroom and expand my home’s living area by 200+ square feet.
If they weren’t properly updating my 3R report, why did I bother getting a permit?
Someday, I may want to sell my home. And if the official record says my home is smaller than it actually is, the online estimates will be off and I won’t be able to list my home’s official size on the MLS or in my marketing literature without a disclaimer.
Having to explain to potential buyers that my home really is 200+ square feet larger than official records would be a real pain. Buyers might feel like I am pulling a fast one on them when in reality, it’s my city’s lack of proper record keeping that’s the problem.
In my area, homes are regularly now selling for $1,100 – $1,400/sqft for similar quality builds based on my FS20 property buying signal. Therefore, missing 200 square feet equals potentially $220,000 – $280,000 in lost value.
I remember talking to a city record keeper six months after I had finished my expansion in 2015, pushing to get my home’s square footage updated. She had promised me it would be done, but four years later still nothing.
Then the home appraiser made me come to my senses.
He said, “Don’t update your 3R report! If you do, you’ll simply be taxed more. Wait until the time you actually want to sell your home and then call to make them update the records.“
Ah, that makes so much sense! I actually never want to sell my current primary residence. My plan is to pay off the mortgage in seven years and keep it in the Financial Samurai estate as a vacation property, pied-á-terre, rental property, or home for my children.
I’m long-term bullish on San Francisco property because I think San Francisco is one of the cheapest international cities in the world. Besides New York, London, Hong Kong, and Singapore, I don’t see many other cities that have as many companies paying commensurately high salaries.
Holding San Francisco property is part of my real estate asset allocation. The other part is owning a portfolio of 18 commercial and multi-family properties through real estate crowdfunding.
Save Big On Property Tax Over Time
Paying property taxes hurt, especially when you aren’t even guaranteed to send your kid to your local elementary school given SF has a public school lottery system.
Your goal as a homeowner is to pay the least amount of property tax possible by making your home seem smaller and junkier than reality. I wanted my records updated basically due to ego. But I wasn’t thinking rationally.
A week later, the home appraiser came back with a report that said my home is actually 270 square feet larger than official records. Let’s say my home sells for $1,200/sqft. That’s $324,000 in value the city does not see or tax.
The property tax rate in San Francisco is 1.24% of the value of your home per year. Therefore, $324,000 X 1.24% = $4,017 a year less in property taxes I have to pay a year. Score! I could use that money to take my wife and son on a family vacation to Hawaii for a week.
If I hold the home for 25 years until my son proudly tells me he wants to buy a home on his own, then I will have saved at least $100,245 in property taxes and probably more like $200,000+ in savings due to likely appreciation and continued increases in the property tax rate.
If I decide to own the home for 50 years, then I will end up saving at least $200,500 in property taxes, and more like $400,000+ due to likely appreciation and continued increases in the property tax rate.
Don’t Be So Diligent
The main reasons why homeowners don’t want to take out a construction permit are because they want to save on permit fees and save on property taxes due to a future higher assessed value once the remodeling is complete.
Don’t let your ego for wanting a bigger and fancier house on public record get in the way of saving you money. Stay as stealthy as possible from the city and let the city operate the way it sees fit.
Unfortunately, inefficient cities will ultimately raise taxes and therefore rents in the long run. But in the short-run at least, it’s up to all homeowners to save as much money as possible.
I never thought I’d say this. But hooray for government inefficiency. Even though I tried my best to update my 3R report, my notes from 2015 say the city is backed up by five years.
There’s always a bright side to everything. Here’s to hoping the assessor’s office takes another five years to update my records.
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Note: Please check your local city and state laws regarding the property owner’s responsibility for accurate record keeping.
What are some other positives of government inefficiency you’ve noticed or experienced? Have you had the same problems of updating your property’s city records as well? Why can’t the government just update the records as the data comes in?