Does a finished basement add value?
A question I get quite often from agents is “Does a basement add value to a home and how much value should I use? This usually occurs when they are doing a CMA and looking at comps to come up with a value for a listing. The simple answer to the first part of the questions is usually “yes”, but the second part is a little more trickier. I know that is probably not the answer they are looking for but it’s not as easy as you might think.
Most agents would probably like for me to tell them that a basement is worth 50% of the value of the upper level or some other straightforward answer but it’s just not that easy. It’s difficult to give a simple answer to this question because it will vary from one house to another.
As I have said in the past, there is “no rule of thumb” in appraising because there is no one figure that will work with everything. What I would like to discuss here is how appraisers look at basement areas when doing an appraisal and how agents should best approach the matter.
Did you even include the basement in the appraisal?
This is a question I get quite a bit, especially after someone looks over the appraisal report and sees that I only showed 3 bedrooms when in fact there were 4, or 2 bathrooms when it should be 3. The important thing to remember is that appraisers must separate the basement area from the other above grade area. In a past post I explained in more detail the rules appraisers must follow for basement areas.
Areas that have any portion that is below the ground is considered a basement. This basement area is separated into finished and unfinished area. The finished area of the basement is not included with the finished area of the main level GLA because they are valued at different amounts.
There are times when a basement area may not even be below the ground, or only a very small portion is. This occurs sometimes with homes that have a split foyer design.
If it turns out that a particular split foyer home does not have any part under ground it still has to be considered as such because the split foyer comps that are being used most likely have an area that is underground and you want to compare the subject and sales on a like basis. It would not be appropriate to lump all the living area of one property together, including the basement level, but then compare it to another home where you have separated the above grade and lower level areas.
As long as the property being valued is being compared to all the sales in the same way you should still get the same estimate of value.
If you didn’t include it how does the basement add value?
Whenever appraisers calculate the price per square foot of comparables sales they do not include the basement areas for the reasons I noted above. This does not mean the area is not being given value.
When calculating price per square foot the appraiser takes the sale price of the home, which includes everything about the house, including any finished basement area it may have, and then divides it by the gross living area. Gross living area is defined as:
Total area of finished, above-grade residential space; calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space.
The price per square foot arrived at will include consideration for all areas including basement because the total sale price used in the calculation included it. In order to make an apples to apples comparison all of the sales are analyzed the same way along with the subject property.
How agents should price homes with basements
If you are a real estate agent and attempting to arrive at an asking price for a home with finished basement there are several things to consider. They are:
- Only use sales and listings in your CMA that have finished basement area, that way you will not have to make adjustments for this feature.
- Look within the subject neighborhood to begin with. If there are no recent sales then start looking in other areas in the same school system and where a potential buyer would also look.
- Look for the most recent sales (within 90 days), however if there are none look in the other areas noted above. You still want to consider slightly older sales in the neighborhood so that you can get some context into how they fit into the overall scheme of value.
- Look within the neighborhood for active listings of homes that are similar to the subject, including the basement.
- Look at recently expired listings of similar homes. By considering these homes you may get an idea of what the upper limit of value is. Since they did not sell it could be assumed that they were overpriced. This may take a little more investigation to make sure there was no other reason that it expired.
- NEVER roll the square footage of the basement into the total square footage of the home. By doing this you will overstate the living area and overprice the home. In an attempt to keep it an apples to apples comparison, you should keep the two areas separate in both the pricing and the description in your MLS system. On a side note, appraisers rely heavily on the data agents include in their listings. If an appraiser thinks that a home has 3,500 sf but in reality it has 2,500 sf of above grade living area and 1,000 sf finished in the basement this can potentially slow down the appraisal process because they will have to go back and research additional comps. This can delay the appraisal process and the loan closing. (updated 9/14/2016)
Confused about adjustments? Not a problem.
It may seem overwhelming when trying to price a home. What with everything that we’ve discussed, and
you still need to know home much you should adjust for. I always tell agents that you don’t necessarily need to do a quantitative analysis when you can instead look at qualitative adjustments.
You can read more about quantitative adjustments vs. qualitative adjustments in a past post but it basically allows you to do an analysis of comparable sales to help arrive at a list price without knowing adjustment amounts. Pricing a home is more about choosing the right comps than knowing how to come up with precise dollar adjustment amounts.
By taking into consideration all of the factors noted above we can get a better idea of value for basement homes.
Question
If you’re an agent does the process I described above make sense? If you have a question leave a comment below and we’ll keep the conversation going.
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None of the agents in my area in WA State abide by excluding finished basements. In fact they do the opposite. A finished basement warrants them the right in their mind to show on the listing and MLS an increase to the total square footage, thus skewing the price per sq ft.
If all agents ignore the rule, because they are sales people and are trying to get the highest price, and appraisers are trying to be accurate, the two data points will never be correct. One party always skewing to get a bigger sales price, while the other taking the nuances of a finished basement out of their price per sq ft thus raising the price per sq ft.
The system is broken. It’s such a silly rule to have below grade, finished basements excluded from an appraisers number. Case in point. 3 comped homes all have finished basements and are being removed to determine the price per sq ft.
The subject property does not have a basement and is being sold at the correct price per sq ft. But when the appraiser does his report, finds that all the comp homes are priced much higher than the home without a basement. There are not enough available comps to choose homes without a basement in the report and now the report shows an incorrect value.
That is definitely a problem, Scott. It is important to compare apples to apples and it appears that is very difficult in your area. Is it possible to contact the appraisers who did the appraisals on the comps to get accurate square footage? As long as you compare apples to apples I would think the outcome would be the same. I think this is an excellent teaching opportunity for agents. It may also require discussions with the MLS or even becoming a member of the board in some executive position to make changes to the MLS.
Why is a second story considered living space, but a walkout basement, especially one that has windows on 3 or 4 sides, is not? If the walkout basement is finished just as well at the main floor, it seem odd to virtually exclude it. The second story is “less livable” since it has no exit. Neither are accessible other than from the main floor. Seem like a very odd rule. On lakes, walk out basements are far more attractive than second stories due to lake access as well. I’m looking at a house where the appraiser valued the main floor at $280/sf and the similarly finished walkout basement at $50/sf. Makes no sense.
This can be kind of confusing. Basements are considered living spaces as much as the main and second levels, however, they are shown separately on the appraisal and may contribute differently to value than the main level. I agree that walk-out basements on lake homes are as desirable as the upper levels. Not sure I cam comment on the example you described without knowing more about the propery.
My home is built a little weird. The kitchen is actually in a finished walkout basement therefore I am assuming that it is not calculated with living gross area. I considered changing one of the bedroom on upstairs (living gross area) into a kitchen. Would that increase the value of my home since I would be taking a bedroom away to replace with kitchen? Also I have searched and there are not homes like that in this area with kitchen in basement. How would appraiser show comps to determine value?
That is a unique floor plan. If it is in a basement then it would not be included in the total above grade living area. This may affect the value due to possible functional issues. It will all depend on what is typical for the area.
what if agents are comparing bungalows to split levels.There are not many splits in the area but there are some yet we were never compared to the same home.we have gotten 5 appraisals none with comparable homes are they just being lazy.some homes in that area tens of thousands more that are more similar than the bungalows.we also have a view of the water and park in front of oir house and live around the corner from many amenities so Im stumped
I would say that if 5 appraisers had to do the same thing they were all experiencing the same problems in getting sales that were truly comparable. Some areas are like that. Appraisers have to work with what they’ve got and sometimes that is not much unfortunately.
It sounds funny, but as a Southern CA appraiser I will only inspect a few properties a year that have basements, and very rarely are they finished. For my area I would delete the word basement and add guest quarters as most of what you said still applies. The difficulty in valuing such features (guest quarters), is that builders and the public record files in my area lump the two together making it impossible to gage either. Agents often continue the trend of adding the features together which again makes it very difficult to value without good data. Local MLS options may also make it difficult to correctly disclose the properties features. When builders, nor local government can get it correct and on a national level it only takes 70 hours to obtain a real estate license, there is much education and effort that needs to be done on the subject.
Thanks Bill, you make some great points. I think that situations like this make it more important than ever for appraisers to be involved in their local MLS so that agents know this. Whenever I speak at different real estate offices agents are surprised at some of the things I say, such as not lumping above grade area and basements together. It is important for them to know because in the end it will help us do a better job and if the agent and appraiser are both on the same page about what you can and cannot include then this may reduce the likelihood of homes not appraising because we’ll all be looking at the home the same way.
I would like to add a few comments.
Someone who wants to know if a basement is worth a specific percent less than the main levels probably does not understand the relationship of cost and depreciation with respect to market value. While, the cost to construct a finished basement could potentially be estimated using a rule of thumb percentage, this would not be the only factor in estimating its market value. Depreciation also has to be considered. And depreciation can be more difficult to determine.
Physical depreciation of basement finish can be different from the depreciation of the main level finish. For example, there may be significantly more physical depreciation in a damp basement than a dry basement. Mildew and odors can play a huge factor in the value of a basement. Meanwhile, on the main levels, mildew and odors may not be an issue. A rule of thumb estimate would ignore these aspects.
Also, functional depreciation can vary from one basement to another. A walkout basement is functionally superior to a basement that only has outdoor lighting through glass block windows. These factors cannot be estimated with rule of thumb percentages of the main floor value.
Of course, all of this is only relevant if a cost approach is relevant. But, the general principles still apply.
Thanks again for the article.
Mark you make some very good points. I think the most important thing to remember, especially from an appraiser’s point of view, is that each case is indeed different. Different properties experience different rates of depreciation and it’s important to know that this must be calculated for each individual property. This is why you can’t make a blanket statement about two different properties because the depreciation will vary. Thanks for sharing your thoughts.
Didn’t you mean split level instead of split foyer?
No, I was referring to a split foyer. These two types of home designs are kind of similar but not exactly. It would be possible for a split level to also be built similar to what I was describing also and the rule would apply to it as well.
Hi Tom, If You are providing an appraisal that is UAD Compliant, You are wrong about a split foyer. If NO part of the Lower Level is below grade it is not a Basement and should be treated as living area. The Subject is on a Slab, If a Split Foyer has ANY, and is usually 2-4 feet below Grade it is a Finished on Grade Basement.
Hi Cliff and thanks for your comment. For the most part I agree with you, however I think you need to look at how the market would view the home. If the split foyer has not areas below grade I would probably still consider the lowest level area as basement because most buyers would probably do the same when comparing it to other split foyers. It might be different in your area but I think this is one time that the conventional wisdom would probably not provide the best way to value this particular home.
This is a question that I also often receive from agents and homeowners. The Fannie Mae forms are confusing with regard to basement, so your article is helpful. Thank you for getting the word out.
Lately I have found that agents are having a hard time with basements so I wrote this. I wanted them to know that while price per square foot figures do not use square footage of the basement the value of the basement is still being considered.
Is calculations of basement square footage measured from the outside walls or only the inside?
Appraisers use outside measurements, however if it is only possible to take interior measurements then an attempt to add the thickness of the wall should be made.
Solid job Tom. As you said, it’s easy to say something like, “a basement is worth 50% of the value of the upper level”, but that’s just a guess. In real estate it’s easy to live by rules like that until we find out they probably don’t work in every neighborhood, price range, or market. I would simply ask, why 50%? Why not 35% or 75%? I think your advice to find other homes with the same feature (or something similar) is key.
Thanks Ryan. I find that picking the right comps can solve a lot of the issues agents have when doing their CMA’s. It is important to bracket the property by the physical characteristics (finished basement) rather than a price you’re trying to reach.
I want to ask if a basement is finished with the same quality standards as the main house above and has an exterior door , would you dare to give me an approximate porcentage in square foot price compare to the square foot price of the above grade living area .Thanks , I would like to know this becoude this is my case .
Unfortunately, there is no rule of thumb for the percentage. There are many factors that are taken into consideration when developing adjustments for the differences including the type of rooms finished, and quality of finish among other things.