I am interested in hearing comments on doing major work such as finishing a basement, adding bathrooms or building an addition when you have a house that in an area that is selling for around $270/sqft. The house is a cape. The idea being that even though you are having expensive work performed you are adding even more valuable square footage.
Typically, basement square footage is valued less than above-grade square footage.
The only way to know if the work would be profitable would be to run the analysis on both situations (rehab costs, ARV, potential profit) and see where the numbers land.
To add, I have seen a property with 4/2 sell less compared with 3/2, rare but it happens.
Square footage is not all the same. Ground floor footage is worth the most. Second floor footage is worth perhaps half what ground floor footage is worth. Basement footage is worth, maybe, 10% of ground floor footage.
Further, you must avoid the temptation to just multiple average selling price per square foot in an area by the size of a house to estimate value. That is NOT how an appraiser will do it. If the average in your area is $270 a foot and you have a house that's 200 sq.ft bigger than a comp, the appraise will not adjust that comp by $270 * 200 = 54,000. The adjustment factor will be something around $90-135 a foot for an adjustment in the range of $18-27K.
If the adjustment was being made for a difference in comparable (i.e. both finished or both unfinished) basement, the factor might be $9-13 a square foot.
If you're finishing a basement in this same area, the value you're adding would be even less than that $9-13 number. The space is already there, you're only finishing it.
Now, if you're in an area where the houses are similar, and most have finished basements, and you're doesn't, you'll have a downward adjustment in value that may be more significant. Your's has a defect vs. the comps. So, finishing may have more effect in a situation like this.
My personal example is a basement unfinishing done by four feet of water. The IRS lets you claim uninsured casualty losses like this, provided you can justify the loss. I tried to find evidence from comps in my area to determine the value that had been un-done by the flooding. The value truly amounted to something like $10 a sq.ft.
The best way to understand the actual effect you might see is to speak with appraisers in the area.
Guys thanks for the information.
J - I did that, and both options are appealing. I will see where the deal takes me
Jon - thanks for the detailed response. I looked into the valuations a little deeper and also reviewed the construction cost that would offset any gained sqft. It seems most profitable to retain its current sq footage. I will be add a dormer to get it inline with nearby similar solds though.
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