While homeowners may ask, “Does a finished basement add value to my appraisal?” as an appraiser, you know the answer is a bit more complicated. A basement may impact a residential property’s value and as an appraiser, you’ll need to evaluate its significance. While determining the contributory value of basements isn’t overly complex, it does pose challenges! To help you, we’ll outline essential steps and provide tips for evaluating the basement’s contributory value.
Summary
Determining how a basement contributes to a residential property’s value requires an appraiser to determine what type of basement the home has, its level of finishing, and take into account common concerns, like evidence of mold or signs of structural concern. By following best practices, including separating the basement from the above-grade finished area, understanding the intended use of the space, and completing comprehensive research, you can evaluate the basement’s contributory value more accurately.
Know your basic basement types
First, let’s discuss the more common types of basements encountered by appraisers.
Cellars
Older homes are more likely to have a cellar. In fact, many homes before the 1920s had root cellars, which were used to store food through winter. Unlike basements, cellars typically have low ceilings, may lack interior access, have a special ventilation design, and are typically unsuitable as living space. It wasn’t until the 1950s that it became more popular to use a basement as additional living space rather than just for storage.
Partial basements
Partial basements only extend part of the first-floor footprint, with the remaining area often consisting of a slab or crawl space. Their construction can stem from additions made to the original structure, making excavation for the new addition challenging, or from a cost consideration favoring the cheaper cost for a partial basement. Partial basements can be turned into living spaces and/or used for storage.
Full basements
Real estate appraisers employ the phrase “full basement” to describe the entirety of the basement space. In this usage, “full” indicates that the basement occupies the entire area beneath the house, as opposed to only a portion of it. Full basements typically have ceiling heights of 8’ or higher.
Exposed basements
A raised basement, often featuring full windows above ground level, welcomes natural light and offers a more appealing and practical environment compared to fully submerged basements.
Walk-up basements
A basement or cellar may have an outside entry or exit. Not all outside basement entry and exits are the same in appeal, use, and value. A walk-up basement has a set of steps—either exterior or interior—that lead from ground level down to an exterior door that leads into the basement.
Walk-out basements
Walk-out basements offer the most direct access as you can simply open the door and walk out to the yard or patio. A home with a walkout basement is built into sloping earth so that only one side of the foundation is completely below grade. The grade on the opposite side is set at floor level for the basement. Patio or entrance doors are then installed to provide access to the outside. Walk-out basements may also be known as a daylight basement.
What distinguishes a daylight basement is the inclusion of full windows that allow natural light to flood the area, creating a living space similar to those above ground. While more costly to construct, daylight basements are often built with the intention of expanding living quarters. In some cases, they serve as accessory dwelling units, with renters accessing the space through a separate entry.
Depending on your region, the terms exposed, daylight, and walkout basements may be used interchangeably. As an appraiser, it is recommended to provide photos of the exterior and interior of the basement and describe the basement for clarity purposes in your appraisal report.
How is the basement finished? Determining levels
Apart from the type of basement, appraisers must also consider the degree of finishing in a basement, as it can affect the overall valuation of a property. A finished basement can potentially enhance the value of a home since many buyers prefer properties with additional finished living space. Like above-ground areas, the appraiser must evaluate the level of completion, material quality, and the layout’s functionality. For instance, considerations may include whether the space features exposed ceilings, suspended ceilings, or fully drywalled ceilings, as well as the inclusion of amenities like a second kitchen area, bathroom, wine cellar, theater room, or other specialty rooms. It’s important to note that not all finished areas are equal.
Conversely, an unfinished basement space indicates that it lacks livable space. However, this area may still offer some value if it is partially finished. Examples include rough plumbing for future bathroom installations, framing, or partial finishes, though not sufficient to be appraised as living space. Even this partially finished space might contribute more value compared to a completely unfinished basement lacking plumbing, framing, or finishes.
For mortgage lending appraisals, the appraiser must indicate the basement size in square feet and the percentage of the basement that is finished, and the number of each type of finished rooms in the basement.
Best practices when appraising a basement
Now, let’s go over the steps you should follow when determining a basement’s contributory value.
Separate the basement from the above grade finished area. Any portion below the ground is considered a basement area.
Classifying a lower level, especially in split-level designs, as a below-grade area is a significant area of contention between real estate agents or homeowners and real estate appraisal professionals. Some agents might list a ranch-style home with a finished walkout basement on the Multiple Listing Service (MLS) as a two-story home. The MLS’s bylaws or local market customs dictate how a real estate agent enters square footage, room counts, and number of stories into a local or regional Multiple Listing Service (MLS).
In an appraisal report completed for mortgage lending, the appraiser follows industry-standard methods that may differ from how agents market residential properties.
Why this may seem unfair to the homeowner or borrower, consistent reporting is a key reason for these appraisal guidelines. Familiarity with guidelines under FHA/HUD, Fannie Mae, etc., is important. Fannie Mae is clear that a level is classified as below-grade if any part of it is below-grade, regardless of finish quality, level of exposure, or window area. Even a walk-out basement with finished rooms wouldn’t be counted in the above-grade room count or counted as a story.
Know the intended use and client requirements
Earlier, we discussed the practice of separating the finished basement area from the above grade finished area, which is standard for most mortgage lending purposes. However, depending on the intended use of the appraisal, there may be more flexibility available. For non-lending purposes, as the appraiser, you may exercise greater flexibility and should value the finished above-grade and below-grade area according to the standards customary in the property’s market. Consistency in evaluating the living areas of the subject property and comparable sales is crucial.
Distinguish between finished and unfinished basements
As we showed above, basements can be finished, unfinished, or partially finished. It’s your job to decipher that.
A common question people ask is: does a finished basement add value to the appraisal?
The answer is it depends. In general, basements add to the value of the home, and a finished basement will likely add more to the value of the home overall (because it increases the amount of living space).
Additionally, you must determine whether the finished area serves as an accessory dwelling unit (ADU). An ADU is a separate living space within a property that typically includes its own entrance, kitchen, bathroom, and living area. An ADU can generate rental income for the homeowner, potentially necessitating consideration of the income generated, and the use of the income approach to value.
Research your market
The value of basements varies based on the property’s market. Do your research to determine how much value a basement adds to a subject property, considering its location and the preferences of typical buyers in the area.
Use comps with similar basements
Strive to select sales that feature a comparable basement and level of finish. If you’re unable to find nearby properties with similar basement characteristics, you might need to consider more distant or older comparables to demonstrate marketability and to avoid making uniform adjustments in the same direction for all comparable properties.
Write a descriptive appraisal report
Provide clear, detailed narratives about the subject’s basement, including its quality and features, accompanied by relevant photographs. A fully finished walkout basement constructed with high-quality materials can notably enhance the home’s value, making it essential to substantiate this through comprehensive details and photographs.
Common problems in basements
We’ve discussed various types of basements and essential appraisal steps for valuing them. However, what aspects should you consider regarding the basement environment, and how will you rate them?
Consider the condition ratings used when observing a property. A home that has a C1 rating is going to be top tier, meaning no issues, like new, and no one has lived there before. A C-6 is at the bottom of the scale, meaning the home wasn’t maintained well and the issues can cause harm to anyone occupying the home. Evaluating the basement’s condition is integral to determining the overall condition rating of the home.
Environmental hazards
There are certain things you’ll be looking for, specifically environmental hazards. One of the biggest issues appraisers run into is mold.
Where there’s mold, there’s moisture, which is another factor to consider when looking at the condition of a basement. Is it your job to know how to fix that issue? No. Your job is to simply document it. Whether you smell musty odors associated with mold or see green, black, or white patches, make a note of it (and take a picture if possible). The best way for you to document is by using the term “mold-like substance” in your reports.
Inspect for any instances of standing water in the basement, as it often indicates inadequate drainage systems or plumbing leaks. This condition can escalate, leading to foundation problems, water-related damage, and other issues. If standing water is evident, it may be necessary to complete the appraisal subject to a professional inspection to identify any underlying cause.
Cracks and signs of structural concern
Inspect for any visible cracks in both the interior and exterior of the basement’s foundation. Cracks in the foundation can jeopardize the structural integrity of the entire house. If cracks are detected, it may be prudent to recommend a professional inspection in your appraisal report.
A basement can reveal potential structural issues, necessitating the reporting and consideration of visible signs such as foundation shifts, bowing or leaning walls, inadequate support beams, or deterioration of concrete, wood, or steel. Additionally, safety concerns such as insufficient ventilation, restricted ingress/egress, past flooding damage, or deteriorating paint should also be noted and considered in the condition rating and overall value.
Pests
While basements offer utility, they can also conceal issues such as pests like rodents or insects. If you observe signs of insect or rodent presence, including damage, droppings, termite trails, or nests, it’s crucial to document and report your findings, and consider recommending an inspection by a qualified professional.
Take the next step with continuing appraiser education
To learn more about complicated topics while meeting your state’s continuing education requirements, consider these courses:
- Residential Report Writing: More than Forms
- Residential Property Inspections: An Appraiser’s Perspective
- The Sales Comparision Approach
For the best value, we recommend joining our Unlimited CE Membership. You’ll get full access to our CE course catalog, exclusive webinars, and our Learning Library, with over 400 resources and materials to help you elevate your skills and your career.
