Valuating Below Ground Square Footage

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So, I have a potential deal with 1400 feet above ground and a full basement with egress. As I understand it now, I cannot force as much value on the underground footage as I can on the above ground footage through improving the property condition...

Anyone have experience with this? Is there a rough formula for calculating improved value of below ground square footage?

Medium grey red iconBrandon Sturgill, Hypothetical Insight, LLC. | [email protected] | 614‑379‑2017 | http://www.InvestHypothetical.com

Brandon -  You are correct, the per square value of a property varies depending it is first floor, second floor, attic and basement.  Basement and attic space are generally cheaper since their intrinsic value is cheaper than either the first / second floor.

What I have done in the past, is to use comparables to get the average % of discount that any specific space would command.  For instance, assuming you have 2 identical properties (hypothetically, but I have seen this quite often in new subdivisions where owners build the same model but some add a basement) one with basement and the other without basement.

Property without basement:  3,000 square feet selling for $300K, or $100 per square foot.

Property with basement:  identical 3,000 plus 1,000 basement, for a total of 4,000 selling for $450K.   You know the 3,000 are selling at $100 per square foot , which means the basement is selling at $50 per square foot.  That would mean that basement space would be at 50% of non-basement space.

You can go to a builder and ask them to quote you for a new house, and for the same house with basement.  You can then make the same calculation.

The prior example was using two properties.  When you make comparables, you want several houses.  Assuming 5 houses with basement and 8 houses without basement.

Step 1.  Find the square footage without basement:  Just add all the values (after making any adjustments) and divide it by the total square footage of all the houses.  Assume you have 5 houses totaling 10,000 square feet, sold for an aggregate of $1MM, which means each square foot is worth $100

Step 2:  For the houses with basement, add the basement square footage, and deduct it from the total home square footage.  For instance, let's say that you got 8 houses and the total square footage is 24,000 square footage divided in 18,000 of non-basement space and 6,00 of basement space.  The total those houses sold were for $2.1MM.

Step 3:  Solve for the basement square footage.  You know (from step 1) that the non-basement space is valued at $100.  That means the 18,000 square feet you found in step 2 are worth $1.8MM.  That means the 6,000 of basement square footage are worth $2.1MM (the total aggregated value) minus the $1.8MM = $300K.  That means the per-square-foot cost of basement space is $300K/6,000 = $50.  You know there is a 50% discount for basement space.

Hope that helps.