Above Grade & Below Grade Areas

[Liz South]

I have to love Mike's response. It pretty much mirrored my own. Found a good response in the Fannie Mae handbook for appraisers (pg 21) which clearly states above is above, below is below and don't mix them up!!!

Thanks for all the responses.

Liz S.

 

[Jo Ann Meyer Stratton]

The whole key is the market and the information available after much due diligence in the market. What information do you have regarding competing sales, actives, pendings? Do you have the square footage of each level of each comparable so that you can compare apples to apples? Do all government records in your area, all the realtors and homeowners, etc lump everything together or do they report them separately? If all of the above only have lump sums then the only way you would be able to know how much square footage is on each level for every one of the comparables would be to measure every comparable your self for this assignment.

As Otis said

In other words, on page one split the lower level out to basement. In the sales comparison approach, if it's customary, then combine them, but you had better clearly indicate it's that way in that market.

Either way the opinion of value would be the same, regardless of how it is reported on page two. But the main point is to describe exactly what and why you did what you did.

Fannie Mae Guidelines--Section 405.06 - Gross Living Area

The most common comparison for one-family properties (including units in PUD, condominium, or cooperative projects) is above-grade gross living area. The appraiser must be consistent when he or she calculates and reports the finished above-grade room count and the square feet of gross living area that is above-grade. For units in condominium or cooperative projects, the appraiser should use interior perimeter unit dimensions to calculate the gross living area. In all other instances, the appraiser should use the exterior building dimensions per floor to calculate the above-grade gross living area of a property. Only finished above-grade areas should be used--garages and basements (including those that are partially above-grade) should not be included. We consider a level to be below-grade if any portion of it is below-grade-regardless of the quality of its "finish" or the window area of any room. Therefore, a walk-out basement with finished rooms would not be included in the above-grade room count.

Rooms that are not included in the above-grade room count may add substantially to the value of a property-particularly when the quality of the "finish" is high. For that reason, the appraiser should report the basement or other partially below-grade areas separately and make appropriate adjustments for them on the "basement and finished areas below-grade" line in the "sales comparison analysis" grid. To assure consistency in the sales comparison analysis, the appraiser generally should compare above-grade areas to above-grade areas and below-grade areas to below-grade areas. The appraiser may deviate from this approach if the style of the subject property or any of the comparables does not lend itself to such comparisons. However, in such instances, he or she must explain the reason for the deviation and clearly describe the comparisons that were made.

Handbook for Appraisers--Page 21 "We understand that some markets consider a finished lower level area as living space. If this is the case, explain the basis for this conclusion in your report and be consistent in your comparisons in the sales comparison grid.

 

[Kevin A. Spellman]

I agree with the identifying the above and below grade-finished areas, but if the topography allows a walkout lower level in the rear of the home and below in the front of the home where do you draw the line between the differences.

It is the appraiser responsibility to adequately describe the market reaction for the levels of finish. If the market pays equal or lesser for the lower level, that is the responsibility of the appraiser.

USPAP and second market guidelines are not the ultimate authority in assignment of value, it’s within the appraiser’s integrity, skills and trust. We are not FNMA appraisers or USPAP appraisers we are Real Estate Appraisers promoting public trust. The Real Estate Appraising Industry was here before either FNMA or USPAP and so was finished lower levels.

 

[Mike Garrett RAA]

Of note..."considered living space" does not necessarily mean Gross Living Area.

Also if you read JoAnn's post it clearly says....."Therefore, a walk-out basement with finished rooms would not be included in the above-grade room count."

It is inconsistent to report above and below grade square footage on page one and then do it differently on page two in the grid.

As I said before, do it any way you want to but that still doesn't make it right. We have Supplemental Guidelines from Fannie Mae, Freddie Mac, HUD, and VA, as well as ANSI standards that all say the same thing...."Below Grade is Below Grade". USPAP says we are obligated to follow those standards and it is moot on above or below grade. The standard or test really is "what would my peers do?".

If your MLS and county is doing something differently it should be your responsibility to ferret out the right information. As for me and my house...I will do it as my peers do...report below grade as below grade.

I honestly wish you well.

 

[Phil Rice]

This is a recurring theme on the forum, and this thread is typical of the way it is treated. Some say go by ANSI, and some say it depends on the market. Here is my two cents:

The underlying issue that everyone seems to dance around is: If we call it GLA, that makes the house worth $(big number) more. Or less if we call it below grade finished basement.

I disagree. No matter what you call it (GLA or basement), the value of the subject should be the same either way. As much as possible, compare walk-out basement to walk-out basement, 2nd floor to 2nd floor, etc. If perfect comps are not available, bracket as much as possible.

ANSI does not dictate the value of a home. Buyers (and sellers) do not care about ANSI, or FANNIE guidelines for that matter.

In my experience, the quality of finish in the basement can vary by a huge amount. It is entirely possible the walk out basement has more value than the first or 2nd floor of the neighbor's house which sold recently.

 

[Mike Garrett RAA]

My point exactly, Phil. An appraiser can use adjustments that are appropriate and supportable. Those could be exactly the same as the upper level, more, or less than the upper or above grade level. The issue is ......"reporting format" and standardization so as not to produce an appraisal report that is ...."MIS-LEADING".

Under most common conditions the lower level or below grade costs less to produce. That is why builders do basements (below grade). IN MY MARKET, above grade for typical tract quality homes ranges from a low of, say, $78 a square foot to as high as, say $108 a square foot. Below grade is closer to $38 a square foot. Ask any contractor or new home builder if below grade is equal to above grade in cost and quality.

Most real estate agents get all hung up on "cost per square foot" but fail to recognize the differences that we as appraisers must use. Their cost per square foot includes everything including the lot and site improvements.

Over the years I have developed a technique that works well for me. Many appraisers IN MY MARKET also use this reporting method...some others do not. I find my method easier to made adjustments for both raw square footage as well as finished areas. Some houses have totally finished below grade areas, some have partial finish, and still others have no finish. My technique allows for the reader to easily understand my thinking in making my adjustments.

The first line of the below grade is used to indicate the total below grade area and % of finish.

1000SF 100% Fin

The second line then indicates the rooms and baths and is where I adjust for the finish

1000SF 100% Fin
4Rm,2Bd,1BA

In this way I can then adjust the comparables for both size and finish

Subject Comp #1
1000SF 100%Fin 1200SF 75%Fin - $3000
4Rm,2Bd,1Ba 4RM,2Bd,1BA +$1500

I handle walkouts on the functional utility line.

In my illustration, the lower level is adjusted at the same dollar per square foot as the upper level only broken out on two separate lines. It is determined by the market reaction to the use of the below grade area as "living space". Below grade is quite common IN MY MARKET. Most new construction has below grade either finished or unfinished.

My files contain two full legal size lateral drawers of builder data. More than 50 different builders in more than 50 different subdivisions. I have cost sheets, plans, marketing brochures, and upgrade lists. While cost does not automatically equate to value, resales IN MY MARKET are strongly influenced by what the new home builders are offering. It is our job, as appraisers, to determine that market reaction.

 

[Randy Beigh]

Phil,

Everything you said is correct, but it doesn't mean that you should combine basement and above grade together.

Just for consisitency sake, they should be separated out. Just because your subject has the most perfect basement in the world, your sales are not likely to be that way. Even more to the point is that basements, typcially, have some areas that arene't finished such as storage or mechanical rooms with furnaces, etc.

 

[wyecoyote]

And when you combine the areas you are producing a mis-leading appraisal report.

Fannie Mae, HUD, and VA all say...if it is below grade it is below grade...end of discussion.

Do it correctly, if you want to adjust both level at the same amount you can do that but I challenge you to prove the below grade is worth as much as the above grade.

Mike,

Fannie Mae even states that as provided one can combine the below grade areas where the comps do not provide the differences for such deviation. That the appraiser must explain why the deviation was done.

Now in one area that I appraise the county does not sepearate out the below grade finsihed area from the above grade finished area. Furthermore, this county lists the houses as one story or two story. All two story houses in county records can be either 1.5 story, 2 story, split entry, tri level, 1 story/bsmnt, 2 story/bsmnt, 1.5 story/bsmnt etc.. (basically anything that has more than 1 level). So how does one seperate out the basement level from the above grade levels without actually going and measuring the sales? How many homeowners are going to let a stranger walk through and measure their house? I have as of yet figured that one out. Calling an agent are you going to really rely upon what they think the square footage of the basement? Ask the buyer or seller really trust them to know exactly the square footage? That would IMNSHO be misleading since the appraiser may get different numbers. So your statement falls on its face as being wrong.

As to proving that basement square footage is equal to above grade square footage. Even in counties that I do that have the square footage on record. I see it all the time with water front properties. Where the typical buyer is more concerned with the total finished square footage than if it is below or above grade. View properties see them as well. 1 story with basement houses that have only 1 bedroom above grade and the rest in the basement to maximize the view from the finished common living areas. I see it all the time where the basement is equal in value to the above grade area. It all comes from the market and what the comps say.

 

[Steve Owen]

Ask any contractor or new home builder if below grade is equal to above grade in cost and quality.

That's a fact. It costs a lot less to build a hole in the ground with concrete around it than it does to build above ground space. Finish could be equal, cost to construct will still be less.

Another important issue is functionality.

Below grade space rarely has the same functionality as above grade space. The floor plan and layout of the below grade space is hampered by lack of exit doors, and in the case of walk-outs it is hampered by exit doors on only one side (usually). I know that there are exceptions, but typically, the below grade space is has at least one large area without a rectangular shape that is best used as a rec room.

What realtors see it as in the market is not the same as what appraiers see it as in many cases. That is why comments about how it is "marketed" are of some concern.

Still, I think there are exceptions and there might be some cases where it is acceptable to put it all together. The most common exception in this area is berm construction. Even though it is technically below-grade, most realtors and most appraisers in this market count it as GLA.

I would be very sceptical of a claim that all below grade space is marketed as living area and always counted together with GLA. Remember that I live in a nono-disclosure state. Our MLS didn't used to separate it out very well either. And, our assessors office is only slightly better than a glass eye for such things. Still, back in the days before we finally convinced the MLS, appraisers typically did it right. It's harder work, but usually is possible.

 

[The Warrior Monk]

What I include in the room count and GLA depend on the layout of the home. Most of my work is nonFNMA so I don't get caught up in those type of guidelines.

A common occurence is homes built into the side of hills. Many times the first level is partially below grade. The entrance is in the level that is partially below grade. The foyer is two stories high; not separated from the second level. I'll include a portion of this level in the GLA and room count. Sometimes the kitchen, dining, and living rooms will also be on this level.

However, I take into consideration the lesser cost per square foot of the first level if there really is one.

There may be a difference in quality between finished partially below grade area and above grade area. I often come across homes that have significant differences in quality between above-grade levels and/or rooms. The living room may be panelled (plywood wall rather than drywall walls to support the woodwork) and coffered ceilings; the bedrooms may have simple moldings. I come up with a base square foot cost for the home and base my quality adjustments on that.