How does a basement space get to be considered "finished"?
Appraisers consider basement space “finished” when there are obvious and intentional changes to the basement that would enhance the basements’ functional utility. The amount and extent of the changes, including the amount and quality of all materials used in basement finish have a direct impact on their contributory value. Another important factor that matters to buyers is the amount and extent of natural lighting in the basement. Full basements with full sized windows or walkout on grade doors are much better candidates for higher quality below grade finish, than a basement with no windows or very small basement windows. For basement space to be measured by appraisers as rooms below grade or basement living space it should be legally permitted, habitable, heated and finished with finished floor, walls, interior trim and ceiling. Appraisers doing bank appraisals follow rules established by Fannie Mae and Freddie Mac which state that if any portion of the basement is below grade or buried by soil, then the entire level should be considered basement and any finished areas in the basement should be considered rooms below grade. Rooms below grade could include family room, den, laundry, baths, storage room or bedrooms, but there are very specific requirements for basement bedrooms- including providing direct egress to the outside in an emergency. The contributory value of the below grade finished areas is determined based on what buyers are willing to pay in the market. A buyer might consider a ranch style home with a finished walkout on grade basement, like a hillside ranch, a two-story home. But the appraiser will separate above and below grade finished areas in the appraisal report as required by Fannie & Freddie, and likely call it a ranch with a finished walkout basement.
The good news is that for many buyers the finished basement with abundant natural lighting has a similar value per square foot as the fully above grade areas! Appraisers will measure this market reaction and report the value of the below grade finish based on the actions of buyers. Sometimes basements are partially finished, there may be finished walls, but no ceiling or finished floors, considered a lower quality and extent of finish because it is not 100%, but one that still may have contributory value if the appraiser can find support in market sales data for partially finished basements. Some basements are part finished, half unfinished and half finished, appraiser will measure the basement finished areas and report what percentage of the basement has living space.
To close: Finished basements are a common way for home-owners to expand their living spaces, without expanding the building footprint and they are very common in our Central Vermont area. High quality basement finish is determined by the amount of natural lighting as well as the quality and extent of the finished areas. Lower quality basement finish could be only partially finished or have no or limited natural lighting. The contributory value of basement finish is measured based on market actions. Finished areas in basements are intentionally created to increase the homes functionality. Intentional and notable changes to unfinished basements are needed and necessary for basement space to be considered finished.
Guy Andrews, CMA Appraisals, INC, Certified Residential since 1998