Investor · Mechanicsburg, PA · Member since 2017 · 110 posts · 50 votes
Hello BP'ers, A quick question for you all geniuses - Is the bedroom in a walkout basement (below grade of course) with egress (conforming requirements) and and a closet, considered while determining comps? I probably know that Realtors see it as a legal bedroom and will advertise as such, but will an appraiser consider it while pulling comps of the property?
Real Estate Agent · Manassas, VA · Member since 2013 · 118 posts · 63 votes
9y
@Amit G. I am 100% on board with @Chris Mason - you will not see the basement bedroom counted in the gross living area on the appraisal because they only count above grade rooms. However, they will (should) compare it to other homes that also have a bedroom in the basement. Same goes for bathrooms in the basement.
I have actually had a listing that was a 3 level townhome - you walk in on the lowest/3rd level. There was a full bedroom and bathroom on that level (main level). Then you walk up to the 2nd level where the kitchen and living rooms were. Then the 3rd level had 2 more bedrooms. No part of this home was below grade - it was built on a concrete slab - 100% above grade. When the appraiser did the appraisal, they would not count the bedroom on the main level! I was shocked. Their reasoning was "it's below the kitchen so it doesn't count." I have spoken to several appraisers since and their opinions on that are all different.
For as many regulations as the real estate industry has, the appraisal is one thing that seems to have been under regulated. I guess because it is just an opinion of value. Either way, it's very frustrating.
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
9y
My experience is the number of equivalent bedrooms listed /sold in a real estare transaction are counted. We have one house where it is as you describe below grade walk out and comps were other 3 bedroom houses regardless of bedroom location. They picked houses that weren't necessarily comparable in my opinion. Not sure if there are area conventions that make a difference. Now if on septic if it is a 3 bedroom rating, it is only ever a 3 bedrooms house.
Hello BP'ers, A quick question for you all geniuses - Is the bedroom in a walkout basement (below grade of course) with egress (conforming requirements) and and a closet, considered while determining comps? I probably know that Realtors see it as a legal bedroom and will advertise as such, but will an appraiser consider it while pulling comps of the property?
My understanding is that the appraiser will consider the whole structure as a single family dwelling and not a duplex, because that's what its probably coded as in the county/city records - based on your write up.
I have a real life example for a property that I will be closing soon (next week). The place is a duplex, but the current owner has rented it out as a triplex. In one of the units there are 2 tenants renting out each room. However, the appraiser considered it as a duplex and used the comps AVG RENT x 2 in his appraisal report.
Investor · Mechanicsburg, PA · Member since 2017 · 110 posts · 50 votes
9y
Thanks @Chinmay J. it is actually a single family with country records showing 3 bedroom. Previous owner converted 3 bedrooms originally on first level to 2 bedroom and added one bedroom below grade! I can see it having a negative impact on the final appraisal if appraiser were to do comps based appraisal rather than income based appraisal. I am not sure if there is rhyme or rhythm on when they choose what. Unfortunately that can make or break the deal!
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Amit G. It's not a commercial property so I doubt you're going to get an appraisal that's income-based. They're almost always comp-based. You might run into an appraiser that factors in income potential but it's not a commercial property. The other fun thing is that what constitutes a room can vary from city to city. Sometimes people convert those 7 foot ceiling height basements into rooms and they "count" and other times they don't. I think the first place I'd start is what's on the tax assessors site. Look at that data to see how they note the "improvements". Again, that's assuming your local market provides that information. The other things I'd do is learn if the previous owner did pesky things like pulling permits to create this additional room. Or did he just decide, on his own, to go ahead and finish it out. Appraisers (from my knowledge) can't factor things like such as unlicensed/unpermitted (not sure what the "right" term is) additions, even if they are theoretically up to code.
Hello BP'ers, A quick question for you all geniuses - Is the bedroom in a walkout basement (below grade of course) with egress (conforming requirements) and and a closet, considered while determining comps? I probably know that Realtors see it as a legal bedroom and will advertise as such, but will an appraiser consider it while pulling comps of the property?
I'd expect an appraiser to do the following...
- NOT count it in GLA.
- NOT call it a 4br instead of a 3br because of the below grade 'bedroom.' If the only way it's a 4br is if that below grade living space is counted, that means it's a 3br and will be compared to 3br comps.
- YES compare it to other properties with below-grade living space, and properties without, to extract value for the below grade living space from market data. If there are no recent, comparable, close, and closed comps with that feature, an appraiser would likely conclude that there isn't demand for the feature, and ergo it adds no value to the home (according to the sales comparison approach that residential lenders care about). By contrast if there are other homes with this feature, and they tend to sell for more, great! That adds value.
This approach can be used for virtually any feature, including completely useless unicorn statues on the roof... if that became a thing and houses with unicorn statues started to sell for more than houses without.
Here in the Bay Area where we've got a housing crisis, we will indeed see appraisers documenting additional market value due to the below grade finished space.
It's not always obvious from the MLS that some living space, or advertised bedroom, is below grade. If you've got that inside scoop (or your agent does from broker's tours), share it with the appraiser.
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
9y
Appraiser in CA also. I agree with Chris Mason
- NOT call it a 4br instead of a 3br because of the below grade 'bedroom.' If the only way it's a 4br is if that below grade living space is counted, that means it's a 3br and will be compared to 3br comps.
- NOT count it in GLA.
In East Coast I am not aware there are added value on basement even it is finished. A plus if you have a play or party room. However, you can find neighborhood similar vintage(+/- 5 years), GLA (probably +/- 150 to 200 sf), Urban( .25-5 mile direct distance) with similar permitted (recorded) sold comp.
In Cupertino, CA I know due to setback distance across from Apple Spaceship, someone sought a permitted full basement with external entry 1500 sf, great room, huge quartz countertop and fire place. 1500+1500 sf. They can get $4200 rent from the plush basement. Home was priced as 3000 sf. 6 months later with multiple price reduction, there was no buyer fell for it. This is in an area where just every home or shack will sell quickly.
Real Estate Agent · Manassas, VA · Member since 2013 · 118 posts · 63 votes
9y
@Amit G. I am 100% on board with @Chris Mason - you will not see the basement bedroom counted in the gross living area on the appraisal because they only count above grade rooms. However, they will (should) compare it to other homes that also have a bedroom in the basement. Same goes for bathrooms in the basement.
I have actually had a listing that was a 3 level townhome - you walk in on the lowest/3rd level. There was a full bedroom and bathroom on that level (main level). Then you walk up to the 2nd level where the kitchen and living rooms were. Then the 3rd level had 2 more bedrooms. No part of this home was below grade - it was built on a concrete slab - 100% above grade. When the appraiser did the appraisal, they would not count the bedroom on the main level! I was shocked. Their reasoning was "it's below the kitchen so it doesn't count." I have spoken to several appraisers since and their opinions on that are all different.
For as many regulations as the real estate industry has, the appraisal is one thing that seems to have been under regulated. I guess because it is just an opinion of value. Either way, it's very frustrating.
Investor · Mechanicsburg, PA · Member since 2017 · 110 posts · 50 votes
9y
Some really great inputs @Andrew Johnson@Chris Mason@Sam Shueh and a great learning experience. Unfortunately that also means that my numbers might not work the way I expected them to be.
I am surprised my realtor did not convey any such issues while providing initial comps to calculate ARV!
Investor · Mechanicsburg, PA · Member since 2017 · 110 posts · 50 votes
9y
Thanks @Heather Skowronsky it is very frustrating indeed! So is the right approach to get appraisal done on any property you get under contract, for beginners like me? I guess the answer is yes, until you are experienced enough to figure out on your own...
Thanks @Heather Skowronsky it is very frustrating indeed! So is the right approach to get appraisal done on any property you get under contract, for beginners like me? I guess the answer is yes, until you are experienced enough to figure out on your own...
It depends.
If you've got the ability (extra down payment funds, or you're a cash buyer to begin with) to "overpay" according to the sales comparison approach of the lender's appraisal, but it's a buy and hold meaning you primarily care about an income approach to valuating it (1% rule, cap rate, CoC ROI, etc), then from THAT perspective you might be perfectly fine with buying the property in question (flippers, by contrast, should regard themselves as handcuffed by what a lender's sales comparison approach appraisal will say).
Still absolutely use the appraisal shortfall to beat the seller up on price, of course. :)
Real Estate Agent · Ellicott City, MD · Member since 2015 · 31 posts · 11 votes
9y
Amit,
While I wish this was not the case, appraisals are subjective. One reason a good listing agent is worth every cent of their commission is that they will develop a working relationship with the appraisers. They will have learned how to comp properties from the appraisers and will share the comps with the appraisers when they come to look at the house.
I wanted to comment on a minor detail. Taxable living area is considered "above grade only" so a finished basement would not be included. Total or gross square footage would include a finished basement because it comprised total living area.
Also, I know of a ton of investors who add bedrooms in the basement to increase value. They always appraise so don't worry (unless you get a bad appraiser).
FINAL TIP!! An FHA appraisal sticks for 6 months so if an FHA buyer backs out it will appraise for that value for the next 6 months. Go with a Conventional buyer if you can because every buyer would get a different appraisal. A bit co fusing but your agent can explain that in more detail. Best of luck with your flip!
Investor · Mechanicsburg, PA · Member since 2017 · 110 posts · 50 votes
9y
Thanks @Chris Mason that's very reassuring. This property's numbers still make sense as it is a buy and hold and not a flip. Its just that I may not get my own money (or maybe get very little) out after refinance, the way I was expecting!
Investor · Mechanicsburg, PA · Member since 2017 · 110 posts · 50 votes
9y
@Joshua Velte that make sense. Taxable square footage being different than sq. foot that can be advertised. I'll keep my fingers crossed at the time of appraisal :) This is a buy and hold and I have renters in place starting August 1st. I am going to get very good rent on this property compared to others in the area! It's just a mixed feeling because of some things that could have been avoided and done differently had I known of these facts earlier...
Residential Real Estate Broker · Crystal Lake, IL · Member since 2012 · 124 posts · 94 votes
9y
A lot of good points and ideas from people here... I don't think any of it matters.
You buried the lead @Amit G. In your other post you mentioned that this 3 bedroom home was turned into a 2 bedroom home by removing a wall on the main level. In addition, there happens to be a bedroom in a walkout basement. Above-grade sqft and gross living space, that's what matters folks!
Not enough info posted here to give an accurate answer. Were the main level bedrooms tiny? Then maybe you are better off with 2 big ones. Are there a lot of 5 person families wanting to move into the neighborhood? Or are there empty nesters looking to downsize that will like the house? The bedroom semantics don't change the value and appraisal as much as it changes your likely end buyer.
I see average price per sqft in Mechanicsburg, PA is $99. Very similar to where I live. The buyers for these homes are pragmatic middle-class people. All this talk would matter a lot more at a price per sqft at double or triple this. I think you are making too big of a deal about a wall slapped up in a basement.
Investor · Mechanicsburg, PA · Member since 2015 · 5 posts · 3 votes
9y
I bought a house in PA that the previous owner transition from a three bedroom to a two bedroom 1st floor because he put two bedrooms in the basement. My realtor told me that it could only be listed as a two bedroom then because the two in the basement were below grade and didn't count. I put it back to a three bedroom and removed the rooms in the basement.
Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
9y
Is this for a refi? My advice is that you can't really affect any change on the outcome at this point, so just order the appraisal and hope for the best. The appraisers input so far is probably the best, but you have no idea, nor any control over how your appraiser will view it. Maybe pull some other comps in the area with similar situations that help value?
Saint Peters, MO · Member since 2017 · 1 post · 1 vote
9y
Real Estate Appraiser here,
In my opinion, a bedroom in the basement counts as finished basement on the appraisal report. No monetary value is given for the bedroom in the basement, but value is given towards the complete finish in the basement.. if that makes sense. Living area above grade is adjusted for differently compared to living area below grade.
To answer your question, if I were selecting comps I would try my best to locate sales with finish in the basement like the subject property, but if there were none I would have no choice but to use comparables without finish.
A finished basement in a neighborhood that has no finished basements adds ZERO value to the appraisal?
That can't be true
You've heard it from me, and now you've heard the truth you "need to hear, but don't want to hear" from a couple appraisers now too.
Appraisers must appraise to data-backed USPAP standards.
For your own use, again, it'll add value to any income-based valuation.
But that's not what lenders use. Lenders need to see data supporting the supposition that it'll sell for more with a finished basement. That means a comparable sales based valuation must be used. Rental income is irrelevant to such an analysis, unless folks are ACTUALLY paying more for properties with that income potential.
Investor · Orlando, FL · Member since 2015 · 23 posts · 6 votes
9y
Find out if the rooms are included in county records. Was the basement room put together by a professional who pulled permits and got an approval with the county. In some cases where they were not, fines can be issued and a tear down order for non-compliance.
Investor · Mechanicsburg, PA · Member since 2017 · 110 posts · 50 votes
9y
@Account Closed , 3 rooms are included in county records. Basement room was put together by previous owner, we just refinished it. I need to find out if they pulled permits for that.
So, is the burden on new owner if previous owner did not pull permits?
Investor · Orlando, FL · Member since 2015 · 23 posts · 6 votes
9y
If it's included, you're probably OK. Sometimes, buyer's run into trouble when borrowing money from a lender and when property gets inspected, they find out permits were not pulled and work was not done according to code. Just a little due diligence may be required. You can call county records permits section, whatever is called in your area to give you a peace of mind.