Basement finishing ROI

[Yon Bell]

I am wondering whether I should finish the basement; I can do it very cheaply myself, but the cost of adding an egress window is worrying me.

1. If I do most of the work myself, how much should adding an egress cost?

2. by finishing the basement, I will have more sqft. Are they valued the same way as above-grade space? Is there a rule-of-thumb discount for the value of this extra space?

[Chris Mason]

Hi @Yon Bell,

I've asked appraisers similar, and the answers are no, and no.

• Price per square foot is never a credible method of valuating real estate to start with. It's just for consumers who prefer ease to accuracy, that's it. Let your FTHB cousin continue using it, but as a REI I'd suggest disregarding it when evaluating a particular house or transaction or upgrade (it's fine to know the aggregate/average number for a given market, it's just not accurate for a specific house the way Zillow/redfin/ManyAgents/etc imply).
• Appraisers generally will not count below-grade as part of their calculation of gross living area, in any case. 
• The appraiser will (or, at least, should) find other otherwise comparable properties with finished basements, and extract value from that by comparing to ones without that sold. If no comps with finished basements are to be found, then the assumption will be $0.00 until and unless there exists market data to prove otherwise. 
• The above bullet could be the cause of an appraisal shortfall when you go to sell the property, if your buyer is willing to pay $50k extra for the basement, but no comps have a finished basement, and the buyer doesn't have $50k extra to come in with for the down payment. In this scenario, 
• I personally would take the 25% or 30% down offer that's $25k less, than the 3.5% down FHA offer that's $25k more, because the gal putting 30% down can handle an appraisal that comes in short (eg, I as a lender might even be able to keep her down payment the same, and just call it a 75% or 80% LTV loan even though she is putting 30% down), but the 3.5% FHA guy is going to ask me for a $50k price reduction, and meanwhile the 30% down gal has found another house already so I can't go back to her at this point.
• No rule of thumb on value, because finished basements may be valued less in your market, more in mine, maybe no value either way in some other market, etc.
• If you're being conservative, just base your yes/no choice on cashflow from renting it out. Assume it will give no value to the eventual sales price of your house. Ensure you intend to own the property for long enough for rental income to pay for the upgrade, and then some (the same way you calculate the break-even point on discount points, when getting a mortgage).