How do appraisers value finished basement square footage?

Question

Hello all,

I am a real estate agent working with an investor in Kalamazoo Michigan and I came across an off-market property that's got about 1,300 sq ft of livable space on the main floor and 600 sq ft of livable space in the basement. However the basement doesn't have any sort of egress so I understand that it's not technically allowed to be counted as finished. My client is hoping to BRRRR and wants to be sure that any property he buys will appraise well after his rehab so he can get his $ out continue the cycle.

So my question is how appraisers may value this kind of livable but not technically finished basement space? And if my client were to add an egress and therefore an additional bedroom and 600 sq ft of finished space, would an appraiser consider this similar to adding a bedroom and sq footage on the main floor or would they value these additions less because they're in a basement?

I know this probably depends on a lot of factors so any general tips and thoughts on this subject would be much appreciated!

Brandon Krieg · Answer

Hi Isa, I am an appraiser (in addition to other things). So, the most accurate (and probably frustrating) answer to your initial question is: it depends. The appraiser will use market data to determine the value add of the finished basement space, and see if it is comparable to the value of finished area above ground. It is all based on market data, and what buyers of similar properties value (and how much they value it). In order to be more helpful, I can give you some general thoughts based on my experience. But remember, it varies based on the area, the specifics of the home, what the market is doing, and more. So, take some of this with a large grain of salt. First, there is the definition of 'Living Area' (usually referred to as GLA on appraisals). This only applies to area FULLY above ground. So, by definition, a walk-out basement or area with an egress window does not count as GLA. This is strengthened by the recent change by Fannie and Freddie to ensure everyone is adhering to ANSI measuring standards (the new change went into effect on 4/1). So, based on your initial description, the home will have 1300 sf of GLA whether your client touches the basement or not. This is not my opinion, this is the Michigan standard for appraisals. Secondly, finished area below grade generally DOES add value to a property. A basement bedroom can be legal if it has the appropriate size/ceiling height/egress/etc, and a true bedroom below grade generally DOES add value to the property. However, in general, the market often does not value finished area below grade at the same 'rate' as finished area above grade. So, while the value will be enhanced by the changes, it will not be enhanced AS MUCH as if the 600 sf and additional bedroom were above grade. Does that help? Again, this could vary based on specifics.

Isa G. · Answer

Thanks Brandon! Even though there is some grey area here, your response makes a lot of sense. This discussion provides some clarity on the off-market property I was looking at and how the data from its most recent listing on the MLS actually overstated the amount of finished square footage and bedrooms the property has. Really helpful to get a local appraiser's opinion on this for coming up with a purchase price and understanding what might be possible for value-add and refinancing.

Isa G. · Answer

Thanks for the feedback on this. My understanding is the same as Josh’s. If a room has an egress window it can count as finished, as long as the space is livable. @Sarah, hearing about the walkout as another option is helpful too. And that’s a good idea on calling an appraiser to ask about the 1 to 1 value comparison of finished in basement vs above ground levels. If it’s similar, I think adding an egress window or two could make sense assuming the basement is already livable and doesn’t need a lot more done. I heard a quote of 6k to install one egress window recently, which sounded pricey to me, but seems well worth it if it creates enough additional sq ft of finished space. For the property I'm looking at, there would need to be an egress added to a bedroom and a second added to the family room for a total of 600 sq ft of finished space.Assuming it is 1 to 1, it seems like a good move based on this scenario: say all you need to do is install 2 egress windows for 10k total, and put another 10k in other finishes, and Portage houses are currently selling for an average of $163/sq ft - that’s equivalent to adding 163 x 600 sq ft = $97,800 - $20,000 = $77,800 in value added. Which leads me to think this is too good to be true, and that finished sq ft in basement is not comparable to finished space above ground. But I'll check with an appraiser and once I get more info on this, I’ll share out on what I find here.

Account Closed · Answer

I don't think it will be a 1 to 1 ratio of cost vs return unless you have proper windows & egress. A whole lot of work for little to no return.

Account Closed · Answer

Hey Isa - I agree with Mike to some degree. Also consider that in Michigan, basements are not counted as finished living space unless there is a walkout. It would improve the marketability but necessarily a huge increase in value.

Josh Bloomquist · Answer

I may be wrong but wouldn’t an egress addition make the basement count as livable? I own properties and live in Michigan and listings seem to count the (finished) basement space if there’s an egress🤷🏼‍♂️. As for the original question, perhaps calling an appraiser for their feedback would be wise, but in general if you’re adding a finished room to a property the value will go up. The question is how much will it cost to add that egress. There are likely comps you could compare to get the estimated value of your property with and without an extra bedroom. Get those and then factor in the cost of the egress. Just my thoughts. Good luck!