What's the deal with finished basements?

Question

From what I've read, it seems like finishing a basement will not add very much value to a home unless it is a walk-out. In some cases, it won't even count towards the square footage of the home. I really don't understand why this is so. If you live in a ranch, finishing the basement should nearly double your living space, and in a 2 story, increase it by 50%. I don't see why being below-grade diminishes its value so greatly. It is still perfectly livable space which you can enjoy yourself or with guests, or store stuff in. Personally, I wouldn't buy a house without a finished basement because it just feels so much smaller. Unless it's finished, I'm sure as hell never hanging out down there. Can someone explain to me why no one values finished basements???

Joe M. · Answer

Finished basements can be a liability in some cases.  I used to own a house with a finished basement and it was a complete pain in the arse.  The ceiling was not a drop ceiling, rather a standard ceiling.  So anytime any work had to be done to plumping, run phone/cable lines etc. the ceiling had to be damaged to gain access to the mechanical's of the house.

Also, it was carpeted and about once a year in the spring moisture would seep into the basement and I would have to be diligent to get it dried up or otherwise it would cause mildew/moisture issues.

Jon Holdman · Answer

Ground floor square footage is most valuable because it costs the most to construct and its the most desirable.  The cost to add a second floor is lower, and the cost for a basement is lower still.

Basement space is often darker, even with the same size windows.  This is especially true in older houses with small windows.  Basements can also be damp and prone to mildew.

More fundamentally as an investor, though, it just doesn't matter.  Values are set by the market, and the market values basement space lower.  Its not zero, though, at least in my market.  It is significantly lower, though.  Just account for this in determining your value.

Anthony Wick · Answer

I finished the basement in my duplex this year. Added a 3rd bedroom and 2nd bath. But I wasn't even worried about equity for it. As a buy and hold property, I wanted the extra rent that a 3rd bed and 2nd bath could bring. My 2/1 gets $1,110 a month and the 3/2 now gets $1,325 a month. The equity could be gravy if/when I go to sell.

Jon Holdman · Answer

Three data points, all from the same property:

Adjustments used for appraisal from October 2009
Main floor: $50/SF
Basement: $10/SF
Basement finish: $10/SF

So, in terms of comparing two properties, a square foot on the main floor (at grade) is worth $50 while a square foot of finished basement is $20.

July 2010 appraisal adjustments:
Main floor: $35
Basement: $6
Basement finish: $8

So, for this appraisal, main floor is worth $35 and finished basement is $14.

This appraiser also used a cost approach for valuation and used $110/sq.ft. for main floor and $35 for basement.  Did not consider basement finish.

There's a side note in there to that's very important for valuation.  Sometimes people get some comps and figure out the $/sq.ft and then use that figure to determine a value.  These adustments show that's incorrect.  A set of 900, 1000, and 1100 sq.ft. houses that are all the same style, beds, baths, garage, quality and finish are going to have pretty close values.  The variation in value is going to be much less than the variation in size.

Yet another data point.  Some years ago I was looking at a specific neighborhood where the county provided detailed sales data.  I looked at all sales over about six months.  For ranch with basement style houses, the price per square foot using total square footage fell in a very narrow range.  Finished or unfinished, didn't matter.  The split between ground floor and basement didn't matter.

The big lesson to take away is that valuation is very local.  You must get to know the area thoroughly in order to be able to determine value.e

Bill Gulley · Answer

Hi, from Jon's example of an actual appriasal (I assume) it appears to be a rather inexpensive home. The quality of the project, it's age and level of functionality will vary. Take a new home for example; the basement will be about 60% of the main and the second can be around 75%. The floor of the basement depending on construction methods can be the same, but the walls will generally be less and the ceiling since that expense is shared with the main floor. More will go into the second floor for a full two story and a little less for knee walls. The roof will generally cost a little more too the higher up you go (labor costs), but it has to be there for one floor or three.

This value will also vary from one part of the country to another. In my area basements are very popular, as a hidie hole from those tornados that blow in from Oz. Souther states, Tx. La, Ms. Al and Fa. for example may have to build a hill to have a basement and with a high water table, hydrostatic pressure can cause real problems.

The value of your basement will really depend on it's finish and function and as Jon pointed out the walkout can be as high as the main floor. The quality of home construction will also be a big factor.

To find the value in your area I just suggest getting the values out of the market for comps and do a few drivebys off comps to get an idea of how they might be finished, etc.

E J · Answer

Very helpful info, Jon. Ty

E J · Answer

Thanks for the response. I understand that it is not as quality of space as the main floor, but it is sure a lot better than being unfinished. If you had to guess, what % less valuable is the basement than the main floor?

What's the deal with finished basements?

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