Improving to Sell: The Math on Finished Basements

By
Industry Observer with Central Station Marketing

Some of the most frequently asked questions by homeowners, seeking to improve their homes to make them more valuable and easy to sell, concern finished basements and their worth in real estate transactions.

Is it a good investment? Will the added sales value pay for the cost? Will it make my home more appealing? Do finished basements count towards square feet?

Ask 10 real estate agents in your area, and you are likely to hear 10 different opinions on the subject. 

Yet, it has nothing to do with the agent’s personal bias or lack of market knowledge.  These differences in opinion happen exactly because most of them do know their markets quite well.

These are all very complex questions, and there are too many variables to consider before you get accurate answers. While I am not a real estate agent, in my years working for the basement and foundation repair and remodeling industry, I happen to have learned quite a lot about basements –finished and unfinished—and their role in Real Estate transactions.

That said, with the help of my colleagues at Thrasher Basement Systems, I will try to answer some of these questions by talking about some of these important variables to consider if you are considering a similar project in Omaha, NE.

While rules change in other cities and states of the U.S., many of these variables may apply to virtually any region of the country.

 

Professionally Finished vs. DIY Job

Many homeowners try to cut corners and finish their basement on their own. While a few are skilled enough to successfully complete the job, most of the DIY projects not only fail to increase value due to poor workmanship and use of finishing materials that are not suitable for a basement, but they also may run into liability issues for lack of proper permits, building and fire code compliance problems, or failure to report the improvement in the property’s tax records.

Basements are like no other room in the house and require special attention not only in terms of design, but also finishing material choices.

For example, basements are wet by nature. Even a properly waterproofed basement has condensation issues due to temperature differences and some level of ground moisture seeping through below grade walls and evaporating into the area. Basements are also prone to flooding due to sump pump and drainage failures and all sorts of plumbing leaks and accidents.

Conventional finishing materials ruined by basement floodingUsing materials that are not designed to withstand moisture or are made with organic or absorbent materials, like drywall, fiberglass insulation, wood frames, sub floors or floors, can lead to serious mold problems in the future.

Basement finishing systems, on the other hand, have the advantage of being designed specifically to work in this humid environment. Cement-core, rigid foam board insulated basement wall panels are a far better and longer lasting choice than store-bought encapsulated fiberglass panels. In Omaha, Thrasher Basement Systems installs Total Basement Finishing Wall panels that are so strong you can hang flat screen TVs and bookshelves on them without the need to look for studs or any special hardware. These panels carry an impressive transferable 50-year warranty and won’t be damaged or become moldy-- even if your basement floods!

It is also important to keep in mind that building codes also vary by region, and in some areas you can’t finish a basement without adding an egress window. In other areas, the egress window is only a requirement if the finished basement will be used as a bedroom.

Hiring a professional, reputable basement remodeling and finishing company is one way to assure that everything will be taken care of as it is supposed to be. An experienced contractor is familiar with permits and codes, will guide you through the process of obtaining all the documentation you need to start the project, and will help with all the inspections and certifications you need after the project is concluded too.

Property Location and Local Market

It is always very important to consider location and market conditions. An expensive basement remodel won’t add much value or appeal to a home located in a depreciated neighborhood. While prospective buyers in these neighborhoods might be looking for homes with additional living space, they are less likely to pay much more than the average price for a comparable home in the same neighborhood.

The same applies to areas where the real estate market is yet to recover from the recent housing crisis and still dealing with a big and slow moving inventory of homes for sale.

A properly waterproofed and dehumidified basement however, is a desirable asset in any type of property, neighborhood and market, especially if the waterproofing system carries a transferable lifetime warranty that will cover the next homeowner for the life of the structure.

While it wouldn’t be considered a finished basement for appraisal purposes, lining the walls with less expensive waterproof acrylic wall panels might be a good investment, as they accomplish two main objectives: they act as a vapor barrier, keeping moisture from the concrete walls from evaporating into the basement, and they make your basement look cleaner and brighter, thus more appealing to prospective buyers. Waterproof basement flooring or subflooring tiles are also a good addition because they hide cracked, ugly and stained concrete floors and act as a vapor barrier as well.

Added Value vs. Added Square Footage

This is where most of the confusion happens when it comes to the true value of a finished basement in Real Estate transactions, because appraisers work under different standards and the rules aren’t as clear as they seem.

To calculate the Gross Living Area (GLA) of a given property, appraisers work under two main guidelines: Fanny Mae and American National Standard Institute (ANSI).

Both Fannie Mae and ANSI guidelines clearly state that any area that is entirely or partially below grade should not be considered as added square footage, regardless of the quality of the finish-- but does that really mean that a beautifully finished basement is worthless when it comes to selling a home?

If you think the answer to that is yes, think twice!

According to J. Patterson, a residential appraiser, as per ANSI rules – which are the rules most appraisers work under -- “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”

That means that, while not included as square footage in a GLA calculation, high quality finished basements are considered in appraisals and do add value to the property, provided that the necessary permits are obtained for the project and the results are inspected by local officials and considered code-compliant. There should be accurate tax records for these finished basement rooms too.

That also means that the cost of finishing a basement can be at least partially recouped when the house is sold. But just how much of that investment can you expect to recoup? 

Cost vs. Value

According to Remodeling Magazine‘s Cost vs. Value report, in 2013, an Omaha homeowner can expect to recoup around 60.2 % of the total cost of a typical basement finishing project in terms of sale price. A typical basement finishing project in the region costs an average of $60,640 and $36,535 can be recouped right away, when the house is sold.

If that is not encouraging enough, according to the same report, basement finishing costs are recovered at a higher rate than many other popular home improvement projects, including a two-story addition, which would actually add to the appraised GLA of the property! In other words, basement finishing adds a whole floor’s worth of living space to the house, for a fraction of the cost of building an addition, and the cost can be recouped at a higher rate than, for example a family room or master suite addition!

The Real Pay-Off!

Basement Man CaveSo, according to industry specialists, a professionally finished basement does add value to the house, and the cost can be partially recouped at a higher rate than most additions, when you sell the house – but is that all?

The fact is that a properly finished basement pays off in many other ways too!

While you are living in the house you will be able to enjoy the extra living space, and if the job was done right, moisture will be under control, mold will no longer be an issue and indoor air quality will be significantly improved because of that. Allergy and asthma sufferers might find some relief from their symptoms at home.

Also, the finished basement will make your home more appealing to a prospective buyer, but there is another benefit that is usually not computed when people think about basement finishing: energy efficiency!

Actually, thanks to new developments in building science, we now know that a properly air sealed and insulated basement or crawl space is the second most important component of a green, energy efficient home. A properly finished basement will be insulated according to the U. S. Department of Energy recommended R-Values, which in Omaha is R-11 for interior basement wall insulation.

Also according to the DOE, an insulated basement provides significant annual savings. In this 2002 document, typical yearly savings between $250 and $400 were reported for standard, 1,500 square-foot homes with a conditioned basement heated by natural gas ($0.72/therm).

As energy prices soared since 2002, the savings are now even more significant!

Add to that the fact that homebuyers these days are actively looking for energy efficient homes, and a recent California study shows that certified green homes sell for an average of 9% more than comparable, non-certified properties in the same area. So, not only can you save some money while you live at the house, but your prospective buyers will also be encouraged by the fact that they too will enjoy these savings.

As I previously stated, there are no simple, blanket answers to all these variables. Cases need to be evaluated individually because homeowners don’t want to throw away their hard earned money on a house they are trying to sell and real estate agents don’t want to give their clients bad advice.

 

With that, I hope this post helps clarify the matter a little and I am looking forward to hearing from the Active Rain community about what their impressions and individual experiences are with selling homes with finished vs. unfinished basements. 

Comments (2)

Elite Home Sales Team
Elite Home Sales Team OC - Corona del Mar, CA
A Tenacious and Skilled Real Estate Team

Since we do not have basements here I really cannot comment.  We finish our garages as you do basements.

Sep 03, 2013 12:48 AM
Cynthia Freeney
Central Station Marketing - Euless, TX
Home Improvement & Building Performance Blogger

Hi, welcome and thanks for reading and commenting. I am curious: how are finished garages threated in an appraisal in your area? Do they count as added living space in terms of usable square footage?  I'd think yes, since it is technically an above grade area? 

Sep 03, 2013 01:08 AM