I just fielded a call from a potential client who was curious about how an appraiser would go about extracting an adjustment from the market, in this case specifically basement finish. In the discussion I explained that there is no factor that appraisers use, but that we turn to the market to try and show us what buyers are paying. Because different markets can act quite differently, I thought putting up a couple of examples of this type of extraction might be useful, both to my potential client, as well as my audience in general.
The following show two different examples of an extraction for basement finish, one in Ann Arbor related to a generally newer house in the $400,000 or so price range, and the other in Lincoln school district in the under $200,000 price range. Both use the same methodology and both show substantial differences in final results, which is why an appraiser cannot just provide a number. Instead the appraiser has to look at the market.
The first sample I went back two years and narrowed my market data to houses between 2000 and 3000 sqft, built between 1990-2010 on the west side of Ann Arbor (used areas 82, 83, and 84) and then downloaded all these sales to Excel and segmented the sales between houses with finished basements and without. The results were 37 sales without finished basements and 62 identified with finished basements. I looked at median and average sales price differences and median and average amount of basement finish, and came up with between $21,647 and $24,500 difference in price favoring those with the basement finish, and between $24.24 per sqft and $27.75 per sqft of basement finish. This provided me with some support for my adjustment. I don’t recall what my adjustment was, but I think anywhere between $20,000 and $25,000 is supported based on this data. That and in my experience, basements in this area cost about $40 per sqft to actually finish.
Here is what it looks like on a spreadsheet:
The next example is using sales in the Lincoln school district, and in this one my isolated properties were between 1,200 – 1,700 sqft in size and built between 1985-2010, also going back two years. I had 48 sales without basement finish and 36 with basement finish, and the median difference in price was $8,953 and the average price difference was $14,420. The median size of finish was 625 sqft and the average size of finish was 703 sqft, supporting adjustments per sqft of $14.32 to $20.51.
As you can see, there are differences in price between the areas and the sizes, as would be expected. Cost remains about the same to complete. Each appraisal may be different, and the numbers found here in these two samples could change depending on how far back the appraiser goes on their data research and what they set as the perimeters for the data search. I offer this to you, my readers, as a simple study showing how I often go about trying to extract an adjustment from the market.
A final word of caution; I would not expect to see an appraiser put this analysis into their appraisal. They will likely do it, and say something in the report about the adjustment being analyzed through market data. This is what they likely mean, but won’t put the actual results into the report, instead they will have it in their files, be it in the office in general, or specific to an appraisal they were working on.
Hope you all enjoyed this simple explanation, and if you have questions about appraisals and appraisal processes, please feel free to contact me. Easiest way to reach me is via email at rach mass at comcast dot net.