This article was originally published here. For additional articles by Tom Horn visit his website.
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.
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