If someone told you that the first level of your home was an unfinished basement, and did not count towards the livable square footage of your home, would you be upset? It would be as if someone arbitrarily erased part of your home, and made it smaller than it really was! This is a really important story for more people than you might think.
Many traditional homes sit on flat lots and are uniformly situated. They may have an unfinished or partially finished basement, then a 1st level with kitchen, living room and dining room, and then a 2nd level with bedrooms. But what about the surprisingly large number of homes that sit on odd lots and don't have a basement. These homes may find that part or all of the first level is below grade. Fannie Mae, banks and underwriters will tell you that if a home's first level is below grade at all, that level cannot count towards the "gross living area", and as a result greatly reduces the value of the home since it will be counted as a basement instead of living space. Here is what one bank representative had to say about this:
"With regards to areas below grade, it is common for the appraiser to not include areas in Gross Living Area (GLA) as per Fannie Mae Guidelines XI 405.05 and ANSI Standards Z765. Which are consistent in definition by stating: The above grade finished square footage of a house is the sum of finished areas on levels that are entirely above grade. The below-grade finished square footage of a house is the sum of finished areas on levels that are wholly or partly below grade. Any level that is partially below grade makes the entire area ineligible for being determined in GLA."
A duplex with a traditional fully finished living unit below grade with the main house above grade, with a Certificate of Occupancy for both units, is an exception to this situation. But, I had a client who had a three level contemporary home in a neighborhood with rolling hills and a lake. As a result, the first floor of the home, which contained one bedroom, one bathroom, and a recreation room, sits partially below grade at the back of the house. Her home is almost 3,000 square feet of total living space in the real world. But in the banking world, based on the Fannie Mae definition of what creates GLA, the appraiser counted my client's house as closer to 2,000 square feet with a basement! Hence, instead of the $900,000 appraisal we were confident in getting in order to refinance the home, we got an appraisal of $780,000 and the refinance had to be canceled.
Imagine telling someone who raises a child in that 1st floor bedroom, and entertains and lives in the recreation room, that the square footage has now been erased from the ability to be counted as Gross Living Area! It seems absurd. If the market will bear a price of $900,000, why wouldn't it be able to be appraised that way.
And the more frustrating part of this story is that when my client bought the home in the real estate boom of the early 2000's, Fannie Mae and the banking industry interpreted their own rules much more loosely, so this issue did not come up when my client bought the home. So now the client may have trouble selling the home, because potential buyers will have trouble getting the proper appraisal to support the contract price.
There are more homes than you may think that fit this scenario. I have seen homes in urban settings where the 1st level is entirely below grade to some degree, and I have seen many homes in areas that are not flat where part of the 1st floor is below grade. Take a look around you the next time you are driving around a neighborhood, and see how many homes have a 1st floor that is not a basement, that are partially or completely below grade.
As an aside, below is the oddball potential solution my client and I considered at the time:
"I just had an odd idea pop into my head on the issue of the first level being partially below grade, which Fannie Mae uses as an excuse to dismiss all of the first level and not use it as Gross Living Area. I am getting ready to go through a similar scenario on another appraisal right now, and was trying to come up with something for what I know will be a problem for those clients. And it just hit me, and it may sound crazy to you but I wanted to run it by you nonetheless, how about digging out around the first level, re-landscaping, and magically make the whole first level above grade!?
I ran it by my other clients who will have this issue, and they are considering this and are going to get estimates to dig it out, make it pretty with new landscaping, and then we can use the whole first level as Gross Living Area, and get the appraisal that we deserve. Obviously we do not want to do something that would ruin the way the house sits and looks against the landscape and the yard, and we also would not want to do something that would be expensive, but just a thought I wanted to run by you."
Imagine having to dig out part of your first level, rip up shrubs, plant new landscaping, painting, and paying for all of it, just to be able to sell or refinance!
I think there should be a variance on this rule, with some logic introduced into each situation. Obviously if a house has "some" of the yard pushed up against it on 1/3rd of the house on the backside, and the 1st level has plenty of light, windows and gets used a living area, an exception should be made!
Tags: appraisal problem, appraisals
Great summary of a situation that I didn't know existed until I got a call from a client complaining about their appraisal. They had just spent a boat load of money refinishing a first floor in a raised ranch (front side was slightly below grade, back is a walk-out) only to find that they could not cash out the new equity that they created. A quick Google search found this piece which answered my questions.
Thanks for the post.
I totally agree. My husband and I just had our home devalued by 45,000 because our game room is partially below grade level. This is the first time this has ever happened to us in an apprasial and it is wrong in my opinion. We use this room all the time along with the hallway and bathroom that is accross from it but not included in the apprasial.
It is not fair. I have a basement on my forth level, I don't have another basement on my third level. It is a game room and has a 1/2 bath accross the hall, that is used all the time, yet it was omitted from our apprasial.
I have contacted my Senator just to see if anything can be done about this discrepancy. When a home is considered one of the largest investments you can make, it is shocking to think entire rooms and area can be omitted on apprasials because they are a little below grade even if they are used as living space. Frankly, it is unscrupulous and unfair.
I agree completely Margie. I hope you get somewhere with your senator, since Fannie Mae and Freddie Mac are now in federal receivership, they are the ones running the circus. It would be interesting to hear what they say, so if you do get feedback post it here. Good luck!
I live in MD, and a similar thing happened to me. I have a raised ranch built into a hill. My kitchen is in the fully finished lower level, which is below grade on the front but has a wall of windows with a gorgeous view on the back. My appraiser told me my newly renovated kitchen doesn't exist in the eyes of Fannie Mae because it's on a partially below grade level. He told the bank I need to install a kitchen in my upstairs level for my loan to get approved!! Does anyone have any similar experiences??
I am hearing about this more and more. This has been a policy of Fannie Mae for a very long time, the problem is that it was loosely enforced, if at all, for a long time. Now that the banks are paying attention to underwriting again after the real estate boom, they are strictly enforcing every single guideline, including this one. And of course appraisers are fearful of retribution, so they are going by the book as well. It is a problem that is going to be with us for while I am afraid…
Here's an idea, don't buy a raised ranch with any lower level portion below grade and you won't have an issue down the road when you believe that the "basement" should be considered to be gross living area. "write your senator", wow!
[...] I have recently had a re-occurrence of an appraisal issue that keeps repeating itself. I am not sure if its part of the tightening of underwriting standards, or if it's logical. But I'd like to explain the recent issue so everyone can be aware of it. This piggybacks off of a blog that I wrote about in the past, related to a similar situation, which you can reference here. [...]
Fannie Mae guidelines do not force appraisers to "dismiss" all areas that are partially below-grade and give these areas less value than they would actually contribute to the property; the guidelines simply stipulate that such areas should not be included in the "above-grade" gross living area. It is instead calculated as a separate area that can still be valued exactly as the fully above-grade area is, especially if the area is a nicely finished walkout area with windows & doors. Just because it is calculated as a separate area does not mean that it cannot be given its full value (i.e. valued exactly as the rest of the gross living area that is fully above-grade). If an appraiser fails to factor in the full market value of such an area, the problem is with the appraiser rather than the fact that the two areas are calculated separately in the appraisal.
Hello Chris, thank you for the comments. The part about below grade square footage being erased was tongue in cheek, I was not being literal. But the fact is that below grade square footage, whether it is finished or not, does not count in the “gross living area” computation. That is a rule straight from Fannie Mae Freddie Mac, and the banking industry. It has nothing to do with the appraiser, they are just following rules. It is not that below grade square footage gets no value, it does get valued. But the problem is that it does not get valued anywhere near the same level of valuation as above grade square footage. And it does not count in the "Gross Living Area", with emphasis on "living". I assume the logic is that mankind was meant to live above ground.
And there are many sellers and Realtors that would like to value below grade square footage on par with above grade square footage. And it seems both the marketplace in general, and the banking industry in specific, does not allow this. I cannot imagine making a case for a house that is entirely below grade, like a cave, no matter how many windows and light it had on some sides of it, and trying to argue that it had the same value as the house with a similar amount of square footage all above grade, it just does not make sense. So a house that has a certain amount of square footage below grade, must be valued to a lesser degree than a house that has all of the square footage above grade.
Another blog about this can be found here: http://www.getloans.com/blog/archives/1700. It goes into this in a little different level of detail. Thanks again for the reply.
I would like to know if the "odd ball" solution of "digging out" was done and if it improved the appraisal value significantly. I have an artificially created hill that was added to make a carport and second level entry into my Mother's home. I have inheirited the home and I am refinancing at this time. Is it worth digging away the dirt??
Hello Sharon. The outdoor solution did work. It allowed us to count the lower-level as finished square footage, and all of it counted in the gross living area. That meant that we could use larger comparables from the neighborhood, and it helped us get a higher value. If digging away the dirt is not a massive project on your home, I do think it would be a good idea to do so. Otherwise you cannot count the square footage from the lower-level that has the ground partially surrounding it. It will allow you to use comparables with a larger square footage, and therefore a higher value. Good luck.
Hi.
I have run into this problem on my recent refi app.
My split level house is built on a concrete pad, as are the one-story houses on either side of me. The current appraisal for my house shows that the entire lower level of my house is below grade, even though careful measurement would show that, at the highest elevation outside of my house, the distance from windows to ground level is almost exactly the same as the distance from windows to floor inside. Our appraisal came in $50K less than our assessment.
My question is–if these rules were applied equally to my neighbors, their houses would be entirely below grade, and they would have NO GLA!!! (And, if everyone used the same rules, NO mortgages!)
Go figger.
This is the exact same thing that just happened to me.
Feel taken advantage of as when buying the property it is "counted" by the listing agent and then when I want to refi, those sq footage are not "counted".
Never knew this strange "rule" existed until 5 minutes ago when I got the depressing phone call.
Just wanted to validate this topic legitimacy.