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SwedishRider
Rider on the Storm
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join:2006-01-11
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Appraisals and Finished Basements

Had an interesting experience that I thought I'd pass along...

I'm looking to refinance into a 30-year fixed mortgage at a ridiculously low sub 4% rate with a local bank.

I have 3 finished floors totaling about 2400 square feet. My first and second floor are about 1650, and my finished basement is about 750, which contains an in-law apartment with a bedroom, full bathroom, and it's own kitchen (which ended up bigger than my kitchen!!).

Bank took a look at what I owned and ballparked a price (as did I) and everyone thought this was a slam dunk... there had to be plenty of equity in the house to make the deal work given my payoff balance vs the value of the house.

Appraiser comes in... walks through and takes some pics... and leaves...

About a week later, appraisal comes back... and it's BELOW what I need to refinance the deal by a few thousand!!! It's tens of thousands below what the bank and I had estimated...

Bad market you say? Times are tough maybe?? No, if it were only that...

Total square footage was listed on appraisal report at about 1800 and change... so I clearly thought it was a mistake as did the bank at first... but come to find out it's no mistake... finished subgrade square footage IS NOT counted into a home's total finished square footage for appraisal comp purposes under the current appraisal rules! I did get *some* square foot credit for usable deck space (hence the 1800sf number, but well below total deck square footage), and I did get some credit for a finished basement (pennies on the dollar compared to actual fixtures in that level).

But in the end.... I was comp'd not against homes in the 2400ish square foot range with 3 bedrooms and 3 full baths, but in the 1600-1800 square foot range with 3 bedrooms and 2 baths, which tanked my valuation. A buyer might value my home differently... a real estate agent can list it using that finished space... but appraisers apparently cannot follow suit.

I will hold my nose as I write that check because the rates are so low the overall savings can't be ignored, and thankfully I'm close enough to the mark to make the deal still work... but lesson learned on this one.

Thought I'd pass it along here as a word to the wise when thinking about finishing off your basement and expecting it to move your home's valuation.


dennismurphy
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Parsippany, NJ
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I have a similar sized home (~1900 sq ft above ground, ~1000 sq ft finished basement, and another ~600 sq ft of mechanical/work room) that I bought last year.

The appraisal came in right where I needed it to be, but also did not include the basement in the finished square footage.

The only upside is that it also isn't included in the tax calculations, so we catch a break and only pay $10k/yr


SwedishRider
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said by dennismurphy:

I have a similar sized home (~1900 sq ft above ground, ~1000 sq ft finished basement, and another ~600 sq ft of mechanical/work room) that I bought last year.

The appraisal came in right where I needed it to be, but also did not include the basement in the finished square footage.

The only upside is that it also isn't included in the tax calculations, so we catch a break and only pay $10k/yr

My finished basement is listed on my field card, but isn't taxed at the same rate as the rest of the finished square feet. They still get me for about $5k/yr in taxes.

When I finished the basement and the property was reassessed, my tax bill went up almost $1k because of the increased property valuation. In fact, my card lists the second kitchen and levied a separate valuation just to make sure it was counted to maximize tax revenue to the town!


SandShark
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join:2000-05-23
Santa Fe, TX
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1 recommendation

Does the basement have a walk-out exposed to grade?

quote:
A: Usually below grade space will not be counted in the square footage as long as the walk-out is below grade or non-existant. Finished basements with walk-outs will definitely add value versus a basement without a walk-out however.

Only basements with a walk-out exposed to grade level on one side can be included in a home’s square footage. Consider this when calculating your comp values but remember the home’s value will certainly be increased by the additional living space regardless of the walk-out.

Read more: Should A Nicely Finished Basement Count In The Price/Square Footage Of A Home? | REALTOR.com® Blogs

»www.realtor.com/blogs/2012/01/20 ··· -a-home/


SwedishRider
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1 edit
said by SandShark:

Does the basement have a walk-out exposed to grade?

quote:
A: Usually below grade space will not be counted in the square footage as long as the walk-out is below grade or non-existant. Finished basements with walk-outs will definitely add value versus a basement without a walk-out however.

Only basements with a walk-out exposed to grade level on one side can be included in a home’s square footage. Consider this when calculating your comp values but remember the home’s value will certainly be increased by the additional living space regardless of the walk-out.

Read more: Should A Nicely Finished Basement Count In The Price/Square Footage Of A Home? | REALTOR.com® Blogs

»www.realtor.com/blogs/2012/01/20 ··· -a-home/

I'll go better than that... I'm built into the side of a hill and two of the four basement walls are out of the ground and have oversize windows. The in-law bedroom has a full size window, there is a giant picture window in the in-law living room, a 3' door with convertible glass storm, and a window over the kitchen sink.

I argued my case using your logic... and lost. Square footage was not counted.

robbin
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Leander, TX
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What is the ceiling height in your finished basement?


SwedishRider
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said by robbin:

What is the ceiling height in your finished basement?

I think it's 8' but not exactly sure. I have a few HVAC ducts that service that zone and the first floor that are framed over and sheetrocked, but other than that, it's full size basement height.

bkjohnson
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join:2002-05-22
Birmingham, AL
Reviews:
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reply to SwedishRider
Had the same thing happen to me a few years back, although they did give partial square foot allowance. In another house - split foyer - the lower level was given full count, even though the rooms on the back side were daylight, but with medium high windows - the ground level outside was higher than floor level.


SandShark
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reply to SwedishRider
Man, that sucks.


SwedishRider
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said by SandShark:

Man, that sucks.

Yep.

nonymous
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Glendale, AZ
reply to SwedishRider
So what happens if your house was blasted and mined into the side of a mountain?
»www.thecavehouse.com/


KrK
Heavy Artillery For The Little Guy
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join:2000-01-17
Tulsa, OK
reply to SandShark
When did this go into effect? My understanding was that fully finished basements that meet the headroom requirements were part of the square footage!
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SwedishRider
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said by KrK:

When did this go into effect? My understanding was that fully finished basements that meet the headroom requirements were part of the square footage!

Both the town assessor and the appraiser told me (after the appraisal was complete) that it's the standard practice used in appraisals. And they said that since Fannie and Freddie are more picky about buying conforming loans, they have tightened up on the appraisal standards and guidelines.


ropeguru
Premium
join:2001-01-25
Mechanicsville, VA
reply to SwedishRider
I call it a scam. That is all it has been since day one with appraisers. They do want they want for whom they work for.


KrK
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Tulsa, OK
reply to SwedishRider
This is in two letters, BS. This means I got screwed royally when I bought my house because they DEFINITELY counted the basement Sq. footage in that valuation. If I have to take off 900 sq. feet plus a bathroom I am sure my house would be considered way over priced compared to other homes and I would be upside down in it in a huge way.

Love it when they change the game after the fact. Too bad you can't just "adjust" the amount owed on a mortgage to comply with the new lower valuation. Wow.
--
"Fascism should more properly be called corporatism because it is the merger of state and corporate power." -- Benito Mussolini


ropeguru
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join:2001-01-25
Mechanicsville, VA
reply to SwedishRider
Was it a local bank? If so, I find it kind of funny that both the appraiser and the town assessor knew this but the bank did not.


SwedishRider
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reply to KrK
said by KrK:

This is in two letters, BS. This means I got screwed royally when I bought my house because they DEFINITELY counted the basement Sq. footage in that valuation. If I have to take off 900 sq. feet plus a bathroom I am sure my house would be considered way over priced compared to other homes and I would be upside down in it in a huge way.

Love it when they change the game after the fact. Too bad you can't just "adjust" the amount owed on a mortgage to comply with the new lower valuation. Wow.

Yeah, you may have gotten royally burned on that one. When you get comp'd during a refi appraisal or a sale, you'll lose that bathroom and square footage... and it could potentially be a deal breaker for bank financing for your buyer.

Better look into it...


SwedishRider
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reply to ropeguru
said by ropeguru:

Was it a local bank? If so, I find it kind of funny that both the appraiser and the town assessor knew this but the bank did not.

Yes, local bank. Appraiser was from other part of the state hired through a blind third party (they pick a rotation pool of appraisers to keep a firewall between the bank and the appraiser's numbers).

But yes, assessor and appraiser knew this... bank reps did not. But in their defense, my in-law apartment is atypical of most homes... it's a unique feature that they don't see very often.


jack b
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Cape Cod
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reply to SwedishRider
Now you can use the new lower appraisal number to appeal your town property tax valuation, maybe win an abatement resulting in lower taxes!
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SwedishRider
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said by jack b:

Now you can use the new lower appraisal number to appeal your town property tax valuation, maybe win an abatement resulting in lower taxes!

I like the way you think.


SandShark
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Santa Fe, TX
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reply to SwedishRider
Do you know if this is just the way it is in your state or is this nationwide? I know it's filmed in Canada, but on HGTV "Income Property", the remodel dude is always telling the homeowners how much more their home re-appraised for after they added a finished apartment in the basement.


SwedishRider
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said by SandShark:

Do you know if this is just the way it is in your state or is this nationwide? I know it's filmed in Canada, but on HGTV "Income Property", the remodel dude is always telling the homeowners how much more their home re-appraised for after they added a finished apartment in the basement.

Good question... not really sure. I would think nationwide as Fannie and Freddie's loan standards apply virtually everywhere. I plan to have a local real estate broker do a walk through to give me a good faith valuation. I'll ask him then.


ropeguru
Premium
join:2001-01-25
Mechanicsville, VA
reply to SandShark
I will b e able to let you know the first of next week. Closing on a home on Monday and will know by then whether or not it counted. I can say that it did not for my home owners.

tcope
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join:2003-05-07
Sandy, UT
kudos:2
reply to SwedishRider
I just refinanced this past January. I have a finished basement with 2 bedrooms, 1 bathroom and no outside access. The appraiser did include the square footage of the basement he did not label the bedrooms as bedrooms (even though they both have closets). As I understand from my friend, anything below the ground is not a basement. I don't recall the label used but it's noted as more then just a room and the value to the home is higher.

I was in almost the same situation. I refinance a 30 year loan, with 25 years left, to a 25 year loan. In order to avoid PMI (again) I had to make one additional payment. Still, lowered the rate from something around 5.75% down to 3.87%.


alkizmo

join:2007-06-25
Pierrefonds, QC
kudos:1
reply to SwedishRider
I'm familiar with how evaluators work.
I'm a mortgage underwriter.
I've sat through a few presentations of evaluators and had to analyze a few of their reports (Instead of just looking at the value).

Evaluators don't all work on the same "model", yet I've had the opportunity to have multiple evaluators do the same property and they were all within 5% of each others.

So here's the "what's what"

Some of them will consider a finished basement in their calculations, but only because they have a SQFT/$ model value that compensates for finished basements.

See, a standard $/SQFT model averages in the cost of the kitchen and bathrooms, which are substantially more expensive per SQFT than living rooms and bedrooms. So if they were to add basement SQFT to their multiplication factor, they'd be overstating the value of the house because that model would "insinuate" that the kitchen and bathrooms are BIGGER.

Some evaluators will have adjusted models to lower the $/SQFT value and then get to include the finished basement SQFT in the multiplication. Most cheap evaluators do not go to that extent.

Long story short, the $/SQFT accounts for the existence of a basement.

The cost difference between a finished and unfinished basement is minimal if things are built to the minimum code. Evaluators cannot evaluate the "quality" of the material that isn't visible.

Added FIY for those interested
A proper evaluator will use the $/SQFT model but will ALSO do a market comparison by finding a few comparable houses that were sold in the area and see what they sold for. Then they make adjustments for each to account for differences in land size, quality of X material, number of bathrooms, etc.

In the end, the BIGGEST influence on the market value of a property is LOCATION.

Each freaking evaluator presentation I went to, they made the stupid "location location location" joke.


SwedishRider
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alkizmo, question:

How should my situation with basement 750sf in-law apartment and full second kitchen and full bath have been handled in your opinion? Quality of finishes meets or exceeds rest of house.


alkizmo

join:2007-06-25
Pierrefonds, QC
kudos:1
said by SwedishRider:

alkizmo, question:

How should my situation with basement 750sf in-law apartment and full second kitchen and full bath have been handled in your opinion? Quality of finishes meets or exceeds rest of house.

If your house isn't categorized as multiple unit property (Basement as one unit, upstairs are second unit) then the second kitchen has little added value because the market demand isn't there. Only very few non-generic buyers would want to pay extra for a second kitchen.

The full bath can be taken into the calculation. Their evaluation should give some points for that, but it does not add as much value as TWO upstairs full baths (One attached to the master bedroom).

As for the quality of the finishing, well.. only the "aesthetic" material would count. And it would only count where it counts, as in, the REAL main floor kitchen.

Also, there's a limit to what the aesthetic material can add in terms of value. There's basically a conservative cap. If your property isn't classified as "luxury", then they cannot account for a marble kitchen counter top. They can only give the maximum value attributed for "average" house counter tops.

It's really all about what house buyers (For that category of house) would care about in their price decision, and that's:

- Location (I won't do the joke)
- Is the house well maintained?
- Is it still modern-ish?
- Sliding scale $$ for land size/house size/# bathrooms (max 3)

The rest is all superfluous. I'm sorry dude.


SwedishRider
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It's classified as single family with accessory apartment. Finished basement full bath was not factored into the appraisal- he simply gave a dollar credit for the entire basement far below what everyone had expected and that was that...

I'm still curious what a real estate broker who knows my local market well would realistically value it at. I've been told that multi-generational homes are gaining in popularity and some locales forbid them, making the legal ones more valuable to a growing number of buyers who want that particular feature.


alkizmo

join:2007-06-25
Pierrefonds, QC
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said by SwedishRider:

It's classified as single family with accessory apartment. Finished basement full bath was not factored into the appraisal- he simply gave a dollar credit for the entire basement far below what everyone had expected and that was that...

I'm thinking that the USA is worse off than I imagined.

As I said before, the professional evaluators I work with, will use two models, one with $/SQFT and one with comparisons. Yet those two models always end up with less than 10% difference, which is amazing.

However, as I said, they use the comparison model very closely with the $/SQFT model so they can correct and balance each others to come up with a final market value!

I'm guessing your bank is contracting cheap evaluators that just follow the generic evaluation model from whatever Mortgage Insurer is ruling the USA.

Here in Canada, we have a federal mortgage insurer (Government backed) and they allow us to evaluate houses ONLINE. They do that with statistics of what houses sold for in that area that are comparable. It works well and costs 38$. So when we actually need a professional evaluator for whatever X reason, they charge us a good 400$-600$ but they do a god damn good job.


SwedishRider
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said by alkizmo:

As I said before, the professional evaluators I work with, will use two models, one with $/SQFT and one with comparisons. Yet those two models always end up with less than 10% difference, which is amazing..

I have to say that a 10% spread is pretty wide to me.

On a home valued at $250k, 10% is a $25,000 swing either way... and that easily can make the difference in a refi or sale closing or not.