Below-grade value relative to above-grade - is this purely subjective?

[SCPerplexed]

I just received an appraisal on my home that I am selling that I don’t fully understand. I would greatly appreciate any insight that an experienced appraiser can give me.

Here is a description of the area in question: my bottom floor, consisting of 3 rooms, is a walk-out basement - it is level with my backyard but below-grade towards the front of the house. Each of the 3 rooms has at least one window and 2 of the 3 rooms are nicely finished with newer flooring, newer plaster, refinished window frames and moldings. The same finished 2 rooms have vents connected to the central heating system. The 3rd room has laundry hook-ups, a large concrete utility sink and a built-in ironing board . That room has paint on the walls but still has an old concrete floor.

The neighborhood I live in has unique old homes - pretty old by most U.S. standards but very old by Southern California standards - it's 92 years old. People buy here, just like we did, to live in a home that is not cookie-cutter and that has some character. The fact that we even have a "basement" is actually a cool novelty to most people - it is, as far as I know, not a deterrent.

As far as comps around here, there are several issues. First, as I said, a basement of any kind is rare in Southern California , much less in my city so there are no comps with a basement (and all comps listed in the appraisal did NOT have basements). Second, there is very little turnover in my neighborhood since many homes have been passed down in the family so even the comps without a basement are sparing (the guy had to use a sale from 8 months ago as one of the comps). Lastly, all the houses in the neighborhood were custom built so they vary greatly in size, shape, and style.

How do you appraise the value per square foot in a basement relative to the above-grade square foot value? In the appraisal, my above-grade value was determined to be $412/sq foot but the adjustment made for the comps (all with no basement) for the below-grade value was listed at $25/sq ft - approximately 6% of the above-grade value. I will admit that the basement does not have nice hardwood floors (it has laminate flooring) nor 9 foot ceilings (it has 7 foot ceilings), but it seems something along the lines of 50% of the above-grade value makes more sense. Can someone tell me how this basement valuation amount is determined? Is there a document/guideline somewhere I can see?

In light of the tornado warnings that were issued earlier this week where I live, I think my basement should have extra value since I had a place to go to be safe and most everyone else did not.:new_smile-l:

Thanks in advance for your responses!

 

[Ricardo]

Hi SC,

You certainly do have a valid concern, for which I agree with your line of reasoning. Being the basement was valued at only 6% of the upper level, I find that very low ratio to be extremely questionable. My own general rule is that a basement area would be somewhere between 25 and 50% of the upper level (gross living area / GLA)for just being there - and an additional amount if there is finished living area. These two figures are usually broken out in the sales comparison grid so it is clear what values were given for each portion of these features.

It is accepted practice to value below grade living areas less than at/or above grade living areas - but 6% ? Without knowing your market area, I can't say how close that is to being correct. But based on thousands of appraisals I've done, and just plain common sense, I'd say that amount is miles off the mark.

I'm going to go out on a limb here and make a dire prediction. I think you may have been another victim of HVCC - which allows (lenders even ENCOURAGE) inexperienced and unqualified appraisers to work in markets they know nothing about, and indeed, shouldn't be appraising at all (it's a government program - that kinda clues you in on how bad it is, doesn't it?) That is a topic unto itself that could span chapters... you can google it or read more about it here on the forum. It is an insideous disease, and one for which you certainly seem to have the symptoms.

 

[Michigan CG]

I know nothing about California but I do know that the COST of a basement is approximately $25/SF when building a new home.

 

[CANative]

The $400± $/psf is just the opinion of market value divided by the square footage of living area (and for the comp sales the sale price divided by the square footage.) That dollar amount includes everything as a lump sum amount. If you had two identical 1,000 square foot houses but one was on 5 acres and sold for a million dollars ($1,000 per square foot) and the other was on a 6,000 square foot lot and sold for $100,000 ($100 per square foot) you would immediately see the folly in relying on price per square foot as a unit of comparison.

Here's what's going on: The GSE's (Government Sponsored Entities - i.e. Fannie Mae and Freddie Mac) in their infinite "wisdom" implemented appraisal policy and designed appraisal report forms which require appraisers to separate "above grade" living area from "below grade" area. This is logical in some areas where basements are more common than they are in California (which unlike the midwest has topography). Living areas in a hole under the house are not the same as living areas above ground (LOL). These areas should not be combined and valued the same as houses with all the living area above the grade. The basement is a separate feature.

However, this simple treatment does not take into account custom built hillside homes where one of the levels is incoporated into the design. If this design is common in the subject's market and homes with this design are bought and sold based on the overall living area then they should be valued that way and compared with similar homes. If not, the the subject should be compared with homes with similar agove grade living area and the daylight basement should be valued as a separate feature or amenity. The value of the amenity will vary based on it's quality, finish and functionality and the markets reaction to these features.

It is improper to use the $/psf number (sale price divided by square feet) as an adjustment for market reaction to variances in square footage because it represents a gross number rather than a specific number for the size of the house. As an example, consider two properties in the same market selling at about the same time. Everything is equal except the size of the residence. One was 1,200 square feet and sold for $200,000 ($167 per square foot). The other was 1,400 square feet and sold for $210,000 ($150 psf). There was a $10,000 difference in the sale price attributable to 200 square feet of living area. That's $50 per square foot. The appraiser would make a $50 per square foot adjustment for differences in living area.

If basements were not common and in the appraiser's opinion the contributory value of a basement in terms of additional living area was half that of above grade area, the adjustment might logically be $25 per square foot.

 

[Happy Val]

I may be wrong, but are you looking at the price/sf located just below the sales price of the comparable sales? If you are, you need to make sure you're comparing apples to apples. Look at the adjustment made for the gross living area and divide by the diffrence in square feet from the subject and the comparble. This is the adjustment made to the upper level, not the price per square foot. Adjustemetns are made based on the difference the market will pay, not the actual price to build. Hope this helps.

 

[Mike Kennedy]

Does the report stipulate and explain the basis for any basement adjustments at all? In the absence of market data (current or dated closed sales, contracted and/or active listings) on truly competitive Pre-Depresssion Era "period" properties with similar partially finished basements, one might reasonably conclude the basement is atypical and an over-improvement with no Contributory Value (per OP statements on the rarity of local properties WITH basements).

Conversely, it is not unusual for late 1800s and early 1900s vintage homes to have entirely finished walk-out first floors including primary (sole) kitchens (common on rural properties). Given the vintage characteristics of the property, IMO, it becomes increasingly important to utilize the most SIMILAR properties and at least one comparable sale (even 1+ years old) from which to determine market (buyer) perception of the Contributory Value of the subjects' basement level.

Did you inquire whether the Appraiser had experience with similar Vintage Properties? Was the Appraiser LOCAL?

PS the Gross Price per Square Foot includes the Land Value and other site improvements not just the Dwelling Improvements - using that factor as an indicator is often misleading.