Can a basement be counted as square footage? Should you include the basement in the square footage when trying to sell a house? These are good questions. I’ll give you a standard answer that will cover most basements, but then let’s dig into the issue since cookie cutter answers don’t always fit every property.
A Standard Answer: Basements should NOT be included in square footage according to Fannie Mae and ANSI guidelines. In short, if the area is below ground level, it doesn’t count as living space. This does not mean a basement cannot contribute to the value though. After all, buyers will probably pay more for a property if it has a basement – sometimes a substantial amount if it is dialed in as a man cave, office, craft room or layer for the teenagers. But no matter how nice a basement has been finished, it does NOT get counted in the square footage (again, it can still be counted in the value – but not as living space). The same holds true for an addition that is above grade, but not connected to the house. This means it probably isn’t a good idea to include the basement in the total living space when selling, but rather find a way to highlight the finished basement and house separately. One other important consideration is that buyers may not be willing to pay the same price per sq ft for a basement as they would for standard above-grade living area.
The Loophole: However, there are some funky cases where appraisers and the real estate community can deviate from this rule and actually include a basement in the living area. Let’s see what the Fannie Mae Seller’s Guide (PDF) says.
Fannie Mae’s Sellers Guide (pages 581-582): “Only finished above-grade areas can be used in calculating and reporting of above-grade room count and square footage for the gross living area. Fannie Mae considers a level to be below grade if any portion of it is below grade, regardless of the quality of its finish or the window area of any room. Therefore, a walk-out basement with finished rooms would not be included in the above-grade room count. Rooms that are not included in the above-grade room count may add substantially to the value of a property, particularly when the quality of the finish is high. For that reason, the appraiser should report the basement or other partially below-grade areas separately and make appropriate adjustments for them on the Basement & Finished Rooms Below-Grade line in the Sales Comparison Approach adjustment grid. For consistency in the sales comparison analysis, the appraiser should compare above-grade areas to above-grade areas and below-grade areas to below-grade areas. The appraiser may need to deviate from this approach if the style of the subject property or any of the comparables does not lend itself to such comparisons. For example, a property built into the side of a hill where the lower level is significantly out of ground, the interior finish is equal throughout the house, and the flow and function of the layout is accepted by the local market, may require the gross living area to include both levels. However, in such instances, the appraiser must be consistent throughout the appraisal in his or her analysis and explain the reason for the deviation, clearly describing the comparisons that were made.”
Why I counted a “basement” in the square footage: There are some instances where a basement can be considered square footage. This can be very tricky though and not every appraiser or lender will see it this way either. The truth is Fannie Mae does allow appraisers to deviate from the traditional below grade rule in certain cases. For instance, I appraised a property where the “basement” was the only level in the house that had any bedrooms or bathrooms (besides a 1/2 bathroom upstairs). The layout was definitely unique, but the city recognized the bedrooms and bathroom as square footage, and the market seemed to accept the space as living area in light of the previous sale on MLS. At the end of the day I could not argue against the market viewing this “basement” as living space, so that’s what I called it. Of course there is usually more than one way to solve a problem, which means I could have considered this area as a traditional basement while accounting for major functional obsolescence because there were no bedrooms or full bathrooms on the first level. But ultimately when looking at the whole picture, and especially the previous MLS sale helping to show how the market viewed this property, I chose to deviate from the traditional below-grade rule. I talked this over with my client and of course disclosed exactly what I was doing and why I was doing it in multiple places in the appraisal report. While it can be uncomfortable to make an unconventional call like this, I believe it was a reasonable methodology for this situation. I am very cautious about deviating from this rule though in most cases.
An Almost Example with Zoning: I can think of a quick example where I almost included a basement as living area. A highwater bungalow had a very nicely permitted additional unit below the main house. This addition was about two feet below grade, so it was technically a basement. However, this property sold twice on MLS as a duplex, and by all standards seemed to be a duplex – albeit a funky one. But there was at least one main problem. Zoning in this area mandated a duplex had to be located on a corner lot. Since the subject property was not located on a corner lot, it could not be considered a duplex per the planning department. This meant the subject property was really a single family home with a finished basement apartment (as opposed to deviating from the below-grade rule and considering the lower unit as living space counting toward the total square footage of the home).
The Main Point: There are unique situations where appraisers should legitimately consider a “basement” in the square footage, but the vast majority of basements should NOT be counted as living space (think 99.9%). Just because a basement is not included in the living space though does not mean it is worthless. If you are selling a home, the basement can definitely add to the total value. The key is knowing your market and studying sales with and without basements to determine what buyers are willing to pay for a basement.
Question: Any stories, insight or questions? I’d love to hear your take.