Rental Property Investor · Member since 2018 · 18 posts · 5 votes
I own a 4-unit multifamily property in Colorado Springs, CO. These units are townhome-style units, and two of the units have unfinished basements with the bones to convert them into conforming bedrooms. The unfinished basements each already have (i) an egress window and stairs leading to the main floor (two points of exit), (ii) a full walk-in closet, and (iii) a full bathroom.
My questions are:
1.) Does adding a bedroom in the basement and getting a much higher rent amount affect the appraisal value? The rent would go from $900/month (2 br / 2 ba) to $1,800 (3 br / 2 ba). I would think since the property is a residential property, the appraisal would be based off the comparable sales approach versus income approach.
2.) Do appraisers care if permits are pulled to finish basement bedrooms? Does DIYing a basement finish affect the value in any way? My father-in-law is a general contractor and we do a lot of DIY stuff. We would obviously leave electrical work to a licensed contractor. The DIY things we would do are:
Hey Paul. For question 1,you are correct, the most widely accepted value approach on residential appraisals is the sales approach, so increasing rent will not directly increase the value. That said, finishing the basement may impact the comps the appraiser uses which could have an impact on the value determined.
@Paul Lee I'm an investor and investor-focused agent in Colorado Springs so I'll share what I see day to day when it comes to your questions...
1. 1.) Does adding a bedroom in the basement and getting a much higher rent amount affect the appraisal value? I would say it's safe to assume the appraiser will use the comparable sales approach, but it also depends on why the appraisal is happening. If it's a refinance or if the property is being sold to a buyer planning to live in one of the units, they will likely use the comparable sales approach. If property is being sold to an investor who is using a commercial loan product such as a DSCR product, then the appraiser may look more at the income approach.
Overall, I would say it sounds like it could be beneficial to either appraisal method, especially since your cost for the renovations will likely be lower than for others.
2. 2.) Do appraisers care if permits are pulled to finish basement bedrooms? No, I personally don't think it matters as long as you have contractors that you trust can get the work done correctly without the need for inspectors to hold them accountable. Most appraisers (and homeowners) will not look at what permits were pulled as long as the work looks up to code. If you try and cut corners and it is evident, then this could change.
That's just my two cents, hope it helps! Good luck!