What’s the Appraisal Value of An Unfinished Basement? Here’s The Math

Basements tend to fall into one of two thought categories: Either they’re regarded as dark, creepy spaces only suitable for storage and mysterious happenings, or they’re a prized home entertainment venue, ripe with potential for big TVs and even bigger couches.

In fairness to basements of all types, the terminology we most often use to describe them — as either finished or unfinished — probably leaves something to be desired. Just because a basement is considered “unfinished” doesn’t mean that the space is a problem waiting to happen, and if you’re looking to purchase a home with an unfinished basement, you’ll want to ensure the value is noted accordingly during the appraisal process.

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To better understand the appraisal value of an unfinished basement, we spoke with Jordan Terrell, a top Westminster, Colorado-based agent. Basements are so common in Terrell’s market that he was able to share hard numbers on the difference in value between finished and unfinished basements, as well as offer insight on what you can expect to pay should you decide to take on the project of finishing a basement yourself.

Let’s recap: What’s an appraisal?

The appraisal is an essential step in the purchase process when you’re taking out a mortgage to buy your next home. Appraisers are highly trained experts who assess a variety of factors — such as location, square footage, amenities, and comparable homes that have recently sold in the area — to determine a fair value for a property.

In short, buyers don’t want to overpay, sellers don’t want to undersell, and lenders don’t want to hand out cash for a house that isn’t worth the amount they’ve been asked to provide. An appraiser is the fourth party who assesses the property and the pending purchase agreement to ensure that numbers align.

Where do basements fit in with appraisals?

While different states and counties may have different regulations (try Googling, “what counts as square footage in [my county]” if you’re curious!), square footage is generally counted for an appraisal only if the space is finished and above-ground.

This means that, in many cases, basements — even finished basements — are not included in square footage calculations. That’s why you’ll sometimes see property listings boasting, for example, a 3,000 square-foot home with an “additional” 1,000 square feet of basement space, because they are likely not allowed to position the home as 4,000 square feet in size even if the basement is finished.

What’s the difference between finished and unfinished?

A finished basement means that the space is properly insulated and painted, there’s flooring and trim just as you’d find in any other room of the house, there’s electricity and temperature control — in other words, a finished basement is fully habitable.

For this reason, finished basements tend to add value to a home because they increase the total amount of usable space, even if that square-footage can’t always be officially accounted for.

But unfinished basements — in all their concrete-and-exposed-pipe glory — aren’t without their own merits. There’s great potential in even the darkest, most cobweb-covered of basements, which means there’s opportunity for real appraisal value.

After all, as the future homeowner, you could absolutely choose to finish the basement according to your own preferences. Or, maybe you’re just thrilled to have lots of storage space, and your plans for the basement include little more than a thorough cleaning before packing in your boxes and household supplies.

As far as what these differences mean in terms of actual value? Well, it depends on who you ask.

“There’s an appraised value and then there’s the consumer value,” says Terrell.

“It’s been said that an appraiser will give 25% per square foot of the above-grade value to the finished basement.”

Let’s put this in practice with a little math:

If a home with 2,500 above-ground square feet appraises for $450,000, that means that the price per square foot is $180. If we assign a 25% value to the basement, that breaks down to $45 per square foot. So, if our hypothetical finished basement clocks in at 800 square feet, there’s an approximate value-add of $36,000, based on what an appraiser is likely to report.

This is where value to the consumer can really step in and overtake on-paper valuations — especially in a hot market like we saw through 2020. Not having to go through the ordeal of planning out and paying for a basement to be finished (nevermind having to live in a construction zone while the work is taking place) can offer more than enough incentive for a potential homebuyer to offer top dollar.

“In a post-COVID era where people and their space is much more important right now, when home offices are a thing; people will pay more for a finished basement,” Terrell notes.

What’s the cost to finish an unfinished basement, and is it worth it?

As a buyer who may be set on the idea of a finished basement, you’ll need to decide if an unfinished space will be a dealbreaker if you find a house that otherwise meets your criteria.

“To finish a 1,000-square-foot basement is going to cost between $50,000 and $70,000 to do yourself,” advises Terrell. And “2,000 square feet is going to cost you between $100,000 and $140,000.”

While these numbers may fluctuate depending on your location and the standard to which you choose to finish your space, having an idea of cost can help you better assess the value of an unfinished basement.

“If the house is [priced at] $500,000 with an unfinished basement, and it’s a 1,000-square-foot basement, then I know that there’s at least $50,000 to $75,000 of value in that basement,” says Terrell. “When I price out a home, I look at what it would cost to finish the basement.”

It’s fair to point out that there will be a considerable difference in cost between a basic finishing job to turn your basement into the equivalent of another living room, and a splash-out project that features upscale perks like granite countertops, a wet bar, and a half-bathroom before you’ve even picked out the furnishings. Whether an elaborate finished basement setup will be worth your investment is, ultimately, up to you. Consider the following factors:

• How long do you plan to stay in the home? If you know you’re going to move again in three years, maybe this isn’t the ideal time to build out your ultimate in-home tavern.
• How do you intend to use the space? If you love to entertain, if you frequently have out-of-town guests, or if you anticipate your family growing, then you can better plan a finished basement that suits your lifestyle.
• Are there additional home improvement projects? Your basement plans may need careful consideration if you have other big projects — like a kitchen to renovate or a bathroom to remodel — in the pipeline.
• Are you hiring a professional or going the DIY route? Getting hands-on is often a great way to save money, but depending on your expertise, it may be worth bringing in the pros.

Since a finished basement is often a journey of personal motivation, prepare yourself for the possibility that you may not see a dollar-for-dollar return on your investment. Though their most recent data is from 2017 and it’s safe to say that a lot has happened over the last four years, Remodeling has an interesting basement remodel cost versus value graph that indicates the former often outweighs the latter.

As Terrell reminds us, however, basement valuation is a market-by-market scenario.

“If you have a market like we have in Colorado — in Boulder where we have these houses that are 1,000 square feet and have another 1,000 square feet of basement and the average price point is $1 million — sellers will come to me and ask, ‘Should I finish the basement first?’”

Terrell shares that, in these cases, he does recommend putting up the cash to finish the space.

“If half of your home is unfinished, and finishing the basement costs you $70,000, and it’s going to jump your price point from $800,000 to $1.1 million? It’s a great investment because you’ll have just doubled the size of your finished square feet.”

Where to go from here

Regardless of your local market, it should come as no surprise to hear that working with an experienced real estate professional can help you navigate (and negotiate!) the waters of an unfinished basement’s value and potential.

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This is also a good time to mention that a proper home inspection — which is very different from an appraisal — is perhaps extra-important when considering a home with a basement. Structural issues and water damage can easily go unnoticed in an unfinished basement, so even if competition is stiff and you’re eager to snap up a great home before someone else buys it, don’t skimp on your due diligence.

Header Image Source: (Michael Chamberlain / Unsplash)