Basements are a regional phenomenon, but in those places they exist, they are a popular way to add low-cost living space to a home.
If you are an agent that sells in an area that has basements, you’ve no doubt gotten the phone call–the call where one of your clients asks if finishing the basement will help improve the resale value of their home.
Of course, a finished or remodeled basement will add to the overall value of the house, but it’s important to understand this type of project doesn’t necessarily create a net profit for the homeowner.
Remodeler Magazine put together a national cost vs. value study showing a city-by-city comparison of the average return on investment for a finished basement. Surprisingly the national average came in right at 79%. In other words for every dollar spent on finishing or remodeling your basement, you got $0.79 back.
Although $0.79 cents on a dollar is not a great investment, in many cases, it’s an acceptable investment for people to make based on their situation. For example, if the homeowner desperately needs additional space, it costs significantly less to finish a basement as opposed to adding main level square footage.
Understanding Cost and Value
Below grade square footage costs 50 to 60% less to build than above grade square footage. This difference has to do with the elimination of exterior cladding and windows. Additionally, the Plumbing and HVAC usually originate in the basement so those runs are less expensive.
So, if you need room to grow the basement makes a great alternative for adding some low-cost space.
The value side of the equation poses a potential problem for the homeowner. Appraisers don’t value basement square footage at the same rate as above grade square footage. As a matter of fact, Appraisers don’t even count below grade square footage in the total square footage of a home on an appraisal.
The appraiser does give the basement and any finished portions of the basement value based on the quality of the improvements as well as the “Functional Utility”. “Functional Utility” is a term an appraiser will use to determine if something can adequately provide for its intended purpose. Bedrooms and bathrooms are great examples of functional utility…when done right.
Appraisers will generally value finished basement space at 50% to 60% of the value of the above grade square footage. This is why market experts recommend keeping the basement budget below 10% of the existing home’s value. Staying between 5-10% is a great plan.
Moving above this percentage doesn’t help with the appraisal, it’s like over improving the basement.
Other Factors That Add Value
There are other factors beyond the control of the homeowner that can positively impact value.
Location is one, there are certain parts of the country where finished basements return a higher value. For example, as we stated earlier the National Average rate of return is 79% while finishing a basement in Washington D.C. returns 119%.
Another factor that impacts appraisal value is the type of basement. There are essentially three types of basements and some are more valuable than others:
Full Basement – This type of basement is most commonly used on flat lots. The wall heights are equal all the way around the basement. The entire basement is actually below grade. Because it’s completely below grade, the entire space is valued at a lower rate.
Garden Level Basement – This type of basement is found on a moderately sloping lot. Some of the space is actually above grade, this means that any of the above grade space gets valued at a higher rate than the below-grade portion of the same basement.
Walkout Basement – The Walkout Basement is found on a sloping lot. This type of basement has a good portion of space above grade. The above grade space includes windows and doors. This type of basement actually allows for ingress and egress. Since this type of basement has the most above grade square footage of the three types, it receives the highest valuation of all three.
Answering the question”How Much Value Does a Finished Basement Add?” is really difficult. But, the homeowner that consults their Real Estate Agent before starting a basement project is wise. It takes an understanding of both the local market as well as appraisal guidelines to be able to give valuable advice on this topic.