The faucet was leaking water when the water was supposed to be off. I unscrewed the faucet piece thing (as shown). Notice the washer is totally chewed up (this house is only 3 years old kind of weird). But maybe someone exchanged their broken one with ours?
Our faucet used a 1/4L flat faucet washer. A side note: when trying to screw the piece back in, make sure the knob is not in the off position. This will cause the piece not to fit.