Unlike finished basements, unfinished basements do not add the same value to a house. Having a finished below-grade living area can add between 10% and 20% to the value of a home. An unfinished basement adds less than 10% to a house’s value.
It’s usually an exciting time, whether you’re selling or buying a property. Irrespective of which side you’re on, you want to get the value of the property spot on.
As a seller, you don’t want to undersell, and as a buyer, you don’t want to overpay.
One aspect of property valuation that confuses many people is how to appraise the value of an inhabitable basement properly.
Do appraisers add it when calculating square footage? Should I complete the basement before selling to increase the house’s value? These questions and more are top of the mind for many homeowners.
In this article, we answer these questions to help you sell or buy properties with inhabitable basements. We also discuss the cost of finishing a basement and whether having an inhabitable basement is better.
Do appraisals consider an unfinished basement when calculating square footage?
Most appraisals do not consider finished or unfinished basement areas when calculating the total square footage of a property because they are valued differently from the finished main level gross living area.
When appraisers value a home, they segment the property into two main areas, the above grade and the below grade. They further break down the latter into unfinished and finished basement areas.
In the comparison grid section of the appraisal form, you'll see two lines covering above grade and below grade.
Under the above grade section, the appraiser lists the total number of rooms, bedrooms, and bathrooms and the total gross living area (GLA).
For the below grade level, appraisers fill it with two numbers similar to the following: 2850sf1438sfwo and 1rr2br1.0ba1o.
For the first number (2850sf1438sfwo), the appraisal means the property has a basement with 2850 square feet (sf) of total area, out of which 1438 square feet is considered a finished livable space.
The last inscription of "WO" signifies it's a walk-out basement. Walk-out basements add more appraised value than traditional basements, although they're costlier to build.
The second number provides more description of the basement.
"1rr" means it has one recreation room.
"2br" indicates there are two bedrooms.
"1.0ba," says there's one bathroom.
And the "1o" stands for one additional type of room.
As you can see, most appraisers separate the home's square footage above ground from below ground. The square footage of the GLA takes precedence over the basement's, even though the latter also has value.
They separate the two so that it's easy to make an apples-to-apples comparison with other properties in the same area.
That said, always consult with the assessor's office in your county and your mortgage provider for guidance on if the basement square footage counts towards the property's square footage. Most states only consider above grade space in square footage calculations.
What’s the appraisal value of an unfinished basement?
There is no standardized way to appraise the value of an unfinished basement. The appraisal value varies from one real estate market to the other, and depends on the historical price of homes with comparable unfinished below grade space.
Unfinished basements do not have the same value as living spaces above ground or finished basements.
That’s the primary reason appraisers separate the square footage of all three spaces for a more accurate representation and comparison with other properties.
So the value an appraiser attaches to an unfinished basement depends on the real estate market. This value varies from state to state. Even within states, the variance can be steep.
Unfortunately, there’s no standardized way to attach a value to an unfinished basement. The historical prices of comparable homes and the forces of demand and supply determine the value.
Does an unfinished basement add value to a house?
An unfinished basement holds value in monetary terms and otherwise. Intending homeowners may see it as an avenue to add custom ideas to the house. They can use the space as a laundry room, extra living space, storage space, rec room, home gym, and more.
It's not uncommon to see home listings emphasizing the size of the basement space. The ads will note the size of the GLA and then include an "additional 1,500 square footage of basement space."
However you dice it, the entire basement is still a space with enormous potential. Intending homeowners can convert them to a below-grade living space with myriads of functionalities.
In an area where basements are highly prevalent, finished or unfinished below-grade spaces will always be in high demand because it's expected.
That's why, even for an unfinished basement, presentation matters. Molding and odor can significantly affect the value attached to an unfinished basement. So, even if it's unfinished, make it presentable and tidy with sealed floors and painted and waterproofed walls.
Irrespective of how tidy they are, they are never as attractive as finished basements.
The value difference between an unfinished and finished basement
The difference between a finished and unfinished basement is that the former is considered a living area, while the latter is not.
An area deemed livable has the following:
Similar conditions as the above grade areas
Electrical system
Heating and cooling system
Finished floors
Finished walls
Level ceiling
Accessible stairway or entrance
Bedrooms must have a closet and an egress window
It costs money to add these features. According to the Remodeling Impact Report by The National Association of Realtors (NAR), it costs $57,500 to convert an inhabitable basement into a living area.
Having a finished below grade living area can add between 10% and 20% to the value of a home.
This figure doesn’t seem far-fetched, considering appraisers value finished basements at 25% per square foot of the value they give the above grade GLA.
So if the appraiser valued the above grade GLA at $200 per square foot, then the value of the finished basement would be $50 per square foot.
It’s, therefore, logical to conclude that a similar inhabitable basement will be valued significantly less than $50 per square foot, considering the cost burden of turning the space into a livable area.
What’s the cost to finish an unfinished basement
The National Association of Realtors (NAR) reports that it costs $57,500 to convert an unfinished basement into a living area. Angie's List puts the average cost of finishing a basement project at $18,400.
Angie's List pegs the cost of basement finishing projects at the lower end of the scale at $2,800 and $34,500 at the higher end.
We suspect the NAR estimate includes electrical appliances, while Angie's List estimate only includes the costs of permits, materials, and labor.
The cost will depend on the size of the basement, labor wages in your area, and material costs. You can budget about $7 to $23 per square foot for your basement finishing projects.
Materials account for 70% of all expenses, while labor and building permits account for 20 and 10%, respectively.
When doing a basement renovation, you'll spend money on the following:
Flooring
Insulation
Drywall
Ceiling
Framing
Plumbing
Electrical
Waterproofing
Paint
Door installation
It's important to also stress the need to adhere to local laws for all basement remodeling projects.
Is it better to have an unfinished basement?
It’s better to have an unfinished basement if you’ll be out of the property in less than three years and if the property is located in an area where basements are not regarded as a premium must-have feature.
There’s no definite answer to this question. It will mostly depend on a few factors, such as how long you’ll be at the property, goals for the space, and the local real estate market.
It’s not prudent to finish a basement if you’ll be moving out in 2-3 years, considering most homeowners do not recoup the project cost. According to the NAR, homeowners recover 86% of the value spent on finishing a basement when they sell the property.
So, if you’ll live in the same property for a long while, it would be a smart decision, granted you keep the cost moderate. You would have used the space and built memories there and still recoup a big chunk of your investment.
The local real estate market will also determine if it’s a worthwhile investment. According to Remodeler Magazine, a homeowner in Washington D.C will make a profit (19%) on the money they spend finishing a basement. The average homeowner in the United States will lose 21% for a similar project.
You also have to consider the cost of your goals. There’s a big difference between a basic living room and an upscale project featuring a wet bar and elaborate furnishings. Will you be able to recoup your cost in your local area?
Takeaway: No more confusion about unfinished basements
In most states, inhabitable basements are not included in the home's square footage.
Notwithstanding, appraisers record their square footage and descriptions separately to make value comparisons with similar properties.
You can finish your basement and turn it into a living area for $57,500. You will also be able to recoup 86% of this sum. Before you embark on such a project, consider how long you'll stay at the property and your goals.
Are you thinking of finishing your basement? Whether you want to finish the basement or it's a basement remodeling project, Westward Renovation's team of experts will work with your budget to accomplish your goals.
Schedule a free consultation with one of our renovation experts today!