The short answer, is yes….. and no. Still confused? Let’s break it down.
A finished basement is one of the most popular home improvement projects for homeowners. A basement is below grade; and in Michigan, walkout basements are also considered below grade and are not calculated in the overall square footage in an appraisal.
Finished basements are popular because it provides additional living space. Whether a finished basement provides one room or multiple rooms, the average rate of return of investment, is only 70%. The rate of return could be less than 70% if it is considered an over improvement.
Scenario 1: Homeowner invested $50,000 into basement improvements, adding a bathroom, bedroom with an egress window, and a family room. Although homeowner expanded the living space square footage, the value for this improvement would be based on the following: increased room count, increased bedroom count and increased bathroom count. The highest value in the Ann Arbor Area for a finished basement for appraisal purposes is $25,000. Some appraisals will provide additional value for the extra rooms for $10,000. This brings the total value for the finished basement to $35,0000; 70% of the original cost.
Scenario 2: Homeowner invested $100,000 into basement improvements. Using the same improvements from scenario 1, homeowner added a movie theater and kitchen. The appraisal came in at $25,000 for the finished basement PLUS$10,000 for the added bedroom, bathroom and finished family room. But wait, you have an additional movie theater room AND a kitchen; that should be worth something….right? Wrong. The movie theater and kitchen would be considered an over-improvement and provides no additional appraised value. In this scenario, the investment provided a 35% return….(Hey, I didn’t create the rules. You can thank the Federal Government’s very strict appraisal Standards and Guidelines)
Here is another way to look at this. Two identical houses were built at the same time. One house was built with standard building materials and the other house was built using gold. The cost of the second house was substantially more than the first house. Since gold is not considered “standard”, the appraiser could only provide a value for standard materials used. The lesson? Cost to build a house (or improve a house) has no consideration for appraised value.
Although finished basements may have the same appraised value, the finished basement with the added movie theater and kitchen will have a higher saleability value than the house without it. You may be able to ask more money for the added features, but at risk is the Appraisal. If a house doesn’t appraise, the buyer will either pay the difference between the appraised value and the contract price, or, be forced to cancel the sales contract if Seller is unwilling to negotiate a lower sales price. Keep in mind, some mortgage rules will not allow the Buyer to pay the difference between the Appraised value and Sales Contract price. It all depends on the type of mortgage.
To further confuse you, appraisals are calculated differently than values for property tax purposes. Remember the story of the two houses where one was built with standard materials and the other one built with gold? Yep, you guessed it. The tax assessor will tax the house built with gold much higher than the one built with standard materials. And the house with the home theater and kitchen? Yep…. those over-improvements will be taxed too.
It’s important to know the difference…..