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, but that is 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!
Schedule a call with me before you do anything drastic to your lot in order to sell.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
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!
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: https://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.
Brian:
Regarding your comment about living in a cave above, in today’s world of rising energy prices, a partial solution to energy efficiency is to place one wall (usually the north wall) into a hill to protect it from the wind and cold. The other three walls could be 100% above the level of the ground, and in fact could consist of mostly glass, especially the south and west walls.
By the definition the energy efficient house just mentioned would not have any area above grade and thus would not be able to get a mortgage. it is time to rethink this bureaucratic rule.
We have an embankment ranch. The north wall of the bottom level is below grade. The space is a family room with a fireplace in the north east corner, and 18′ of glass including an 8′ slider in 40′ of wall space. The floor is 3′ or more above ground level. Welcome to my basement…..
That is an excellent point. By definition your house almost does not exist! And we know our government wants more energy efficient housing, so what will they say as far as a mortgage is concerned to those who choose to achieve energy efficiency by taking the route you suggest. You cannot promote such energy efficiency on the one hand (which our government does) and then dis-incent it by having your rule makers (Fannie Mae & Freddie Mac) enforce underwriting guidelines that don’t encourage the very behavior they are trying to promote! So if they have their way, we’ll all be living in proper Colonials, with 2 stories above grade, and an unfinished basement. And we’ll keep things nice and orderly and not live in different types of housing stock so the rule makers at Fannie Mae and Freddie Mac don’t have to be bothered??
Brian,
Never been on your blog before, I have been a appraiser fo 28 years. I am doing an assignment right now and if you google it yours is the first site that comes up beside the actual Selling Guide. As appraisers keep it apples to apples everyone should be on the same page. I wrote this comment about 5 mins ago.
Partially below grade comment
The subject is a style of home that has an area 300 square feet that is partially below grade. As per Fannie Mae guidelines, specifically XI 405.05 and ANSI Standards Z765. As the county assessors office consistently adds these areas into the gross living area in the subject and all properties similar to the subject, there is a significant variance when comparing the GLA as identified within this report and GLA as reported in county records. The appraiser has not incorporated this GLA as to conform to Fannie Mae Guide Lines. The appraiser has also removed the square footage of similar areas of the comparables. It is further noted that this is an extremely homogeneous area with many homes the have identical GLA when built.
There is a large difference between level skills out there. A great many of the experienced appraisers left the buisness after HVCC. They all had money and retired. Appraisal buisness is a mentor buisness and always has been and I do not think the goverment thaght it through. I ran a shop for 14 years and peaked at 250 appraisals a week. I hired appraisers with minimal experienced and then did what everyone else did. I showedd them how to fill out theform quickly and effeciently. They knew how to appraiser but thet were really form fillers. Now you have to be able to read market areas, know obsorbition rates etc. none of them do. If you say they should go to school you are right. But thats closing the barnyard doors after all the horses were already gone.
There’s a major point that’s being missed here. The purpose of the appraisal is to estimate a value that a buyer would pay for the property, a market value. A rule that “erases” the value of below grade space moves the appraised value further away from the market value. Furthermore, the rule is substituted for the professional discretion of the appraiser.
This same thing just happened to me on a refinance so I did some research into the a Fannie Mae code (see below). It basically reads that the sq footage is below grade, but it is up to the appraiser to evaluate the value. In my case above ground was $100 per sq ft and below was $50. So I complained and explained that even below grade the value is the same as the other levels and should be $100 per sq ft. I have contacted the BBB, the DLLR and the third party appraisal company. I expect they will agree and re-asses the value. How could they not?
I, 405.05: Gross Living Area (11/01/05)
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 and finished areas below‐grade” line in the “sales comparison analysis” grid.
It boils down to the fact that this will vary market by market. And it also depends upon the level of finish as to whether below grade square footage may merit a higher dollar value than most below grade finished square footage. So the bottom line is that there are a lot of variables, the marketplace is a variable, the level of finish is a variable, and also the appraiser that happens to be coming out to your house is a variable. Good luck!
Well, I just found out about this the hard way, trying to refinance. Bought home in 99, Wanted a refi to do some upgrading. Went to bank that has my mortgage. Unable to get the refinance due to ” Unacceptable security parcel”. Why? In 1999 I had 1543 sf GLA. The calculations rules then change. In 2012, I have 98 sf GLA and 1445 sf of below grade space. I asked the underwriter, If I had 1543 sf of GLA in 2012, would i get the loan? Absolutely they said. Why do I not qualify for it then? They said ” because according to the appraiser report, you have an unacceptable security parcel because you only have 98 SQ ft GLA”. This is a serious national problem with no fix in sight.
It gets better. We found this out in 2010 while trying to refinance. Our home would only be compared to other 3 bedroom 2 1/2 baths even though our walk out finished basement has a bedroom and full bath.It is finished to the same new level of consistency as the rest of the house. So we contested it and nothing was done so we in turn took it to the tax office and tried to appeal our 4 bedroom 3 1/2 bath taxes-which are high in our area anyway. Guess what-no go. Its insane. We are getting taxed on a 4 bed 3 1/2 bth living space but cant get the value of it. Something needs to change!
Wow, that is astonishing. Although I guess I should not be that astonished that local government wants to squeeze somebody for every tax dollar they can get. Too bad that these different entities do not sync up and follow the same rules. I can see how it is frustrating though. You have mortgage lenders and underwriting rules that will not allow you to take advantage of and get the proper valuation out of the extra bedroom and bathroom; but then you have a taxing local tax entity that will value it because they want to squeeze as many tax dollars out of you as possible. It is not difficult to see how that seems unfair!
I am in the process of refinancing my 3 (all above ground) level townhome. A previous appraiser counted the first level in the gross living space, (I assume) because the first level contains the rec room front door, garage door and walk out to the back yard all on the ground level.
However, when I switched lenders, the second appraiser came out and counted all 800 sq ft as below grade. He counted the fireplace in that room as an extra upgrade, but is not considering the extra 1/2 bath or the rec room as living space. None of this level is below the ground in anyway, shape or form.
This has been an extremely frustrating and long process.
Hello Sharon. I believe your first appraiser was correct in counting the first floor in the gross living area (GLA), because its all above grade, and you do actually have living area there (the rec room and bathroom). So I would ask your second lender what their process is for an “appraisal challenge” and challenge the 2nd appraiser’s non-use of the 1st floor living area, based on Fannie Mae and ANSI (American National Standards Institute) definition of GLA as anything above grade, that is used as living space. A rec room and a bathroom are living space! Good luck!
Hello anyone,
I am a Raised Ranch home owner. We bought this home in 2005. We are considering moving to another state and recently had our 4 bdrm home with 2 bath appraised. The appraiser came back to us along with the realtor saying our home is not a 4 bdrm, it is a 1 bdrm with finished basement a 3 car garage on alomost 2 acres of land. The realtor and the apprasier can not find any comp’s in our area even close to our home…ever! What frustrates us is the town just came through last year and assessed us at 4bdrm home,2 bath,3 car garage. What do we do?
That is really frustrating, agreed. I think the first thing you do is go to the tax assessor’s office and explain that both FNMA as well as ANSI do not concur with their tax assessment, and that they need to use market standards in assessing it, and lower your tax assessment. Then, when you put it on the market to sell, you need to hope for an all cash buyer where the lending rules won’t matter, or look for someone with a big down payment (like 30% or 40%, or more) so that if the place under appraises, the required loan-to-value of their mortgage program (likely 80%) will still be met, and your buyer’s loan would still be approved.
Brian,
I am curious who did the digging out for you? did you have to consult an architect first, did you use a landscape architect or something for the initial plan, or did you just get a backhoe and start digging? 🙂
I have a similar situation on one edge of the house, probably 1-2 ft which as you know invalidates the entire area.
The client simply hired a landscaping contractor who showed up with a small bobcat, and a couple of laborers, and they started to dig out, regrade, and then plant some new shrubs. It was actually a very simple process. Good luck!
I built a house in 1984 in which all 3 bedrooms are “below grade”. No indication from the architect or builder that there would be any problem. But they easily meet every other requirement for access, egress, lighting, etc. It is energy efficient – always cool in the summer and easier to heat in the winter. Only one wall is below grade. I’m now trying to sell it and according to the guidelines my house has NO bedrooms. This doesn’t just cut into the value of the house, it makes it virtually unsellable! My real estate agent valued the house over $200K. Now what do I do?
Hello Dave, that may indeed be a difficult sale if you have a buyer someday that requires financing. According to the Fannie Mae rules that will be a tough loan to make. But I can see it being made if the buyer has at least a 20% down payment, larger would be better, and if the appraiser can find comparable properties, then I think you would be okay. But if they try to compare your property to other homes in the area that have all bedrooms above grade, that is going to be a problem. It is all about finding comparable properties for the appraisal. If there are other homes in the neighborhood like yours, and if some of them happen to be transacting around the time you want to sell yours, I think you will be okay.
This is ridiculous. I too have been lambasted by our over simplifying, lazy, cookie cutter, government standards. The government works for us so my hope is thru legislation or pure common sense that this law is repealed or at least allows those of us that bought split level homes in good faith a grandfather exemption. The banks and some of our government entities created FM/FM to do exactly what they did, figure out a way to take the one thing that we all thought they couldn’t get their hands on (our home equity) and they all made billions in the process. Creating it(securities), destroyig it (short sells) and then supposedly fixing it(bail outs with AGI included). The Bush monster and the big banks – you all know it is true and if you think otherwise please educate yourself. Now, since they accomplished their goal of robbing us it is time to put the lid back on and dissolve those entities- what a surprise! Well I am sick and tired of paying taxes to fund criminals. Who decided it was ok to change the rules that cost me $40k of equity and $60k of refinance savings? I would love to know if anyone has considered a class action lawsuit against those government entitities. MAYBE THEY ARE PROTECTED OR MAYBE THEY ARE NOT BUT THEY WONDER WHY SOME PEOPLE DO HORRIBLE THINGS WHEN THEY GET BACKED INTO A CORNER BY BIG BROTHER. WE ALL NEED TO UNITE AND FIGHT FOR WHAT IS RIGHT, NOT LIE DOWN LIKE A BUNCH OF SHEEP. I do get a little passionate about this topic but there certainly should be an appeal process or a review by Fannie Mae. Any lawyers out there that would care to comment? BTW I was not making threats to big brother but you never hear all of the facts when horrible things do happen. This scenario is why we have a government with checks and balances – we need to put those into action. I just do not know where to start but would certainly participate. My best ally right now is the serenity prayer:)
Brian, great forum and medium, thank you for that. Can you help us unite even more than you have? I will be a custoemr for life and generations to come if you can!
I have a house built on a hill. The realtor is now calling the lower level a basement. A third of the lower level is below ground, but we built retaining walls and have windows on three sides of the other two thirds of this level. Since we have retaining walls, and it is clear that part of the lower level is above ground, why is the realtor calling this a basement?
Hello Karen, I am afraid the Fannie Mae Guidelines XI 405.05 and ANSI Standards Z765 say if “any” portion of the lower level is below grade, it cannot be counted in the GLA (Gross Living Area). Those rules state: “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.” You should get credited for a finished basement, not just an unfinished basement, but if there are bedrooms and bathrooms on the level that is partially below grade, Fannie Mae nor an appraiser will be able to count those in the GLA I am afraid.
Brian, I am selling my tri-level home on over an acre and received a copy of the appraisal yesterday; it came in far less than the sales offer. According to the appraiser I only have 2000 square feet of GLA, and 3 bedrooms, 2.5 baths HOWEVER I am paying property taxes on 5 bedrooms, 3.5 baths, and 2911 square feet. When I purchased the home in 2000 the appraisal was for 2911 square feet of GLA. I had the home reappraised numerous times for refinancing purposes and each time the FULL appraisal showed 2911 square feet GLA. This is the first time that the GLA was 2000 square feet. Since when can a government entity determine that 911 square feet of your home that you paid for 13 years earlier doesn’t exist?!?!? AND at the same time insist that you pay property taxes on a portion of your home that “doesn’t exist”?!?!?!. You have been a loan officer since 1986, therefore you know that these “guidelines” are just that GUIDELINES and that it is people like you who insist on following everything “by the book” screw it up for honest people like me who keep their promises and actually pay their debts, only to find out that I should have left my home go back to the bank 5 years ago because the appraisal industry just screwed me over by taking away 900 square feet from my home making it worth less than what I paid for it in 2000!!!
I had no idea this was a factor in house appraisals! That being said I would have NEVER bought this house! Thanks incompetent government!
I just found out that our appraisal for a re-fi came back with our house listed as a 2 bedroom with a GLA of 1000′ sq ft. What? So my house has decreased in value? Yes! Absolutely! I am shocked at this bizarre government regulation that has no exception for uniquely built houses many of which are split levels. My contemporary house was built in 1980 and has always been a four level layout with living space on every level. It is four bedrooms and two baths. I now know that 1300 sq ft is considered a basement! When I refinanced in 2009 my house was at 2300 sq. ft. of GLA. Who is this rule working in favor of? My neighbors house is 150 sq ft larger than mine but the GLA is all above ground. His house appraises 50k higher than mine for this fact alone! I am sick! What am I supposed to do? The rules need to change!
I am not sure this is government’s fault. After all, Fannie Mae and Freddie Mac started as private/quasi-private institutions and created their own rules, which included these appraisal rules about below grade living area. Having said that, there does seem to have been an uneven application of these rules over the decades, and I have seen different interpretations of it by different appraisers and different lenders at various times. As I said, I was completely unaware of this rule when I started in the mortgage business in 1986, but when it started to be applied more rigidly when the mortgage crash came, I certainly became aware. I am afraid there is nothing you can do at this point, but hope to find someone that can pay cash for your property, that values it the same way you do, or maybe there is a buyer that needs a loan, but can get a loan from a non-Fannie Mae, non-Freddie Mac lender (these are called portfolio lenders). And, it may also be that you may trip across an era where all these guidelines change, or at least the application of the guidelines loosens up.
Value can still be assigned to the below grade area, it is just done so in a different grid on the sales comparable approach. It is always best to compare apples to apples when possible. So if recent sales of similar homes that also have finished below grade areas have sold, then they should indicate what the market would pay for them. Typically the market pays more for above grade living area, and less for areas that are below grade. There is a different feeling in most cases, usually less sunlight and most of the time (but not always) slightly less quality of construction. If the home is one or two stories designed to be above ground, usually it has a different feeling about it and sometimes a more usable or functional floor plan as well, and the market pays more for that. The problems that we as appraisers find, is that the assessors will include the below grade areas and the agents will follow suit. Then we are left trying to figure out what the comparable sales above ground living area size is and how much of it is finished basement. Many times it may be difficult to find similar recent sales with below ground living areas as well, which also can complicate things.
Great feedback Aletha, thanks! And you are correct, I was being more tongue in cheek when I said below grade square footage “gets erased”, but there is indeed some value assigned to below grade square footage. The problem comes when realtors, buyers and/or tax assessors try and assign it the exact same value as above grade square footage. Thanks for reading.
as an appraiser who works in an area where most homes are built into hillsides I can say this- In the past Fannie Mae guidelines have been open to interpretation with little to no actual guidance. As they are standardizing things more and more, these types of issues come to light. Guidelines state that you have to break out the areas, however it is up to the appraiser to determine the value of the below grade area by studying how the market reacts to it. Typically one level homes cost more to build and therefore will cost more per sf. In addition, areas with elderly populations etc. may pay more for single level homes. However if that type of construction is typical of the market, then the Comparables will have like living areas as well. Fannie Mae does not tell appraisers how much to value these areas, if the market suggests the typical buyer will pay the same for below grade as above grade living area than the price per square foot adjustment would be the same, however now that the market is more standardized and it is easier to analyze these types of living area, it may come to light that these area may be valued at none or just a portion of the above grade living. It is determined by the market not by the appraiser and may fluctuate depending on the area as well as the current market conditions. In a time when buyers were not as picky because people were snatching up homes just to get one, they may have paid any price for any type of living area, now that people can be more choosey buyer preference may have changed the values of these areas. It is in constant fluctuation and should be analyzed every time.
This is really excellent feedback Heather, thanks for commenting. And you are right, I believe the guidelines can be interpreted. But with lenders running scared of “buybacks” and with Fannie Mae and Freddie Mac having lost so much money, everyone is underwriting in very rigid fashion. But I do think there are lenders and underwriters that will interpret the rules with logic, as you have, and take a more market specific approach, and see what the local market dictates. I have seen problems where in a lenient environment where no one even knew what a buyback was, this issue was not raised, so realtor and the marketplace would market a 3 BR home with a bedroom below grade in the basement, and comp it to other 4 BR’s, some of which had all 4 BR’s above grade, and no one knew any different, and the sale was made as a 4 BR. And now that far more lenders and underwriters have to be more rigid and wary of buybacks, that home is far more likely to be a 3 BR with a finished basement now. And while the finished basement will get some value, it will be hard to comp it against a 4 BR home where all bedroom’s are above grade. It’s a case by case issue, and I am sure as the market stabilizes, we may stop hearing about this issue, and logic will be the norm again.
What many appraisers do is, they don’t count the below grade level in GLA, BUT, they make a substantial adjustment for the “finished” basement, so the final value is essentially the same as if they HAD counted the GLA.
Does anyone have any updated or recent guideline changes? This just happened to us. Our estimated tax value was $418,000 without our basement finished. We had a 9 room, 2 1/2 bath, 2995 SF home. We invested over $30,000 to finish our basement, which is only 1/4 below grade with a full walk out. We added 2 bedrooms (both with full windows outside) a full bathroom, a wet bar and family room with hard wood flooring adding 1495 SF to our home. When we had it appraised last week, the appraiser counted all as a basement and didn’t adjust the GLA. The outcome, our house is worth $421,000 according to that appraiser, not even getting the money we invested, when we were expecting to come in somewhere north of $480,000. While we have a great home now, this really sucks. What the appraiser didn’t take into consideration is in two of the compatibles, which also has walk out basements there are rooms counted in the GLA but because the appraiser is using how the real estate agents listed the homes or how our city assessed them we are getting hurt. I can’t wait to get my new tax assessment which I sure will count at least some of our 1st floor in GLS. If we get a tax assessment on $450,000 I am going to go nuts…come on banks, real estate agents and appraisers…get your acts together..
The guidelines are the same I am afraid. The appraiser may be using comps where the realtor’s counted the finished basements in the GLA, but that does not mean that is how the appraiser counted it. The appraiser may have adjusted for that in the adjustments, and is likely treating all the comps equally, and is likely applying the below grade square footage rule across the board to all comps. I’d have to see the appraiser to comment in more detail. But the bottom line is that the market will deliver you the price the home deserves when its time to sell. Just be careful when looking at offers when you sell your home someday. Offers where they have a small down payment are going to rely completely on the appraisal, and that could be an issue. Offers with a large down payment, or all cash offers, means the issue may just go away partially or fully.
We recently built a home. I am a home builder and therefore we built it ourselves. We are in Oklahoma, in which case there are not many basements but they are definitely out there. I built several myself in our city. After the third try, we finally received an appraisal that took into account the full value of the fully finished, walk out basement. (After all, that is were most of our bedrooms are, two bathrooms, family room, laundry room, etc.) We were getting set for closing from our construction loan to our permanent mortgage and the appraisal was denied by the bank’s underwriter (per Fannie Mae guidelines). Even though we finally received a good appraisal, the appraiser could not find enough basement comps in our area, and therefore had to use non-basement homes and apply adjustments. These adjustments were greater than the underwriter will allow (per Fannie Mae), and therefore we are in limbo. We finally have a good appraisal, but the basement comps just don’t exist in close enough proximity to us or as a recent enough sale (for those in close proximity). We are therefore in limbo. We have a construction loan we are paying on, but can’t get into a permanent mortgage because of the underwriting guidelines. This whole system is a mess. It should not be this difficult to build a basement home in tornado alley. If GLA included the area “below grade”, this would not be an issue as using an “above grade” comparable would not result in significant adjustments and cause the appraisal to be denied.
I agree with you Lenny, and I am sorry you are going through this. You would think that this would be more common in tornado alley, you are correct. And you would think as a result it would be really easy to find the proper comparables to comp your home with and more easily get the loan through. Why there are not similar comps in an area with heavy tornado exposure is confounding. Of course the rules are so rigid, they will not yield unless you can come up with the right comparable sales for the appraisal. You may want to look into getting a portfolio loan (non-Fannie Mae, non-Freddie Mac), or even a commercial loan, where they have different guidelines and a looser approach to valuing a home of this type. Of course the terms may not be as attractive, but at this point to be safe, you may have no choice but to look for this as a plan B.
we converted our garage into a family room, with finished hardwoods, heat, etc. It has several windows of average size and a walk out door, that walks right into our driveway. When the appraiser came he is value this as below grade. Because when he entered my house at the front door he walked up several stairs to do so. So now he considered my converted garage as below grade and did not inclue 576 sq ft in my appraisal… at all. Is this correct?
If your garage is entirely above ground, and its now finished space, it should be counted, especially if its attached to the home. Is your garage attached or detached from the home? If they did not count it I would ask your lender to ask the appraiser specifically why they did not count it.
We are rebutting an appraisal in Alabama received two days ago concerning a refi.
The home is situated on the land so we can view the surrounding estate which is downhill from the home building. The home sites on 5+ acres of land with a over a 1/4 mile private paved drive. Like beach houses, mountain houses, lake houses, the front of the home is the view. The rear of the home(s) are just that, the back or rear entrances.
Our home is three floor levels with slab concrete foundation. The first floor is the front door to the home, has ground level entry and is fully heated and cooled, as is the entire home. There is front door parking as well. There is a 2nd floor back door rear entry to the home with a carport. The second floor consists has a large atrium within that vaults through to the third floor of the home.
The Tax Assessor states the home to be 3,269 sq. ft.
The Insurance Company state the home to be 3,200 sq. ft.
This Appraiser states the home to be 2,100 sq. ft., and states the First Floor to be a partial basement with a crawl space. However, the First Floor is the foundation of the entire home and is all concrete. There is no crawl space anywhere. Says the frame is 1.5 levels. The home is 3 levels. There is a retaining wall at the rear of the first east foundation line, but the majority of this first floor front door entry to the home is out of the ground has windows and is the Front Door Entry to the home. There are two bedrooms, I full bath, a large reception area and a laundry room and mechanical room on the first floor.
Again the second floor of the home has a rear door back entrance but is not the front door entry to the home and is secondary.
I have read the Fannie Mae and Freddie Mac Selling Guides and understand to a point what is being stated by all who have written to your site.
Seems to me that there should be value given to basements that have walkouts if built out/ finished as the remainder of the homes fully above ground space sq. footage. Maybe not 100% of the value but certainly value added. I do not see where the Appraiser should just erase the space as if it does not exist with no value.
I have read the Appraisal several times and the appraiser on the Sales Comparison Grid does state the in the basement /finished rooms below grade section, the sq. footage, rooms and baths and on each comp. However, the value I see no value for this space just minor adjustments on the comps. A negative 1,075 on one comp, a positive 6,500.00 and 1,500 on the second comp and a positive 1,165 on the third comp. These are not any real value. Impossible. He is giving non realistic value to the sq. ft. called he is stating to be a partial basement. Furthermore, this is the front door to our home and is not a basement.
There are many home with full basements, partial basements and walkouts and more in the area as this is the foothills of the Appalachian Mountains. Comps are not an non existent issue here.
Furthermore, the comps uses are not similar settings and are in older subdivisions, smaller lots and clustered homes. Ours is an estate lot, very private, 1/4 mile + paved drive heavily wooded and a view lot as well.
I see no provision for view lots or maybe just overlooked. Any knowledge here from you?
Also, I see nothing addressing the front door entry of the home being on the first level of the home in our instance. I do see where appraisers are taught in 101 and up that the Front Door delineates where the GLA Begins.
I am going to bring up other comps I found with 1/3 of a mile from our home three homes under construction at over $440,000.00 construction loans and with land purchases at over $100,000.00 each. The appraiser fails to mention a word about these comps, and states there is little comps out there.
The Appraiser used 2 comps that were listings as well. One a 1/3 of a mile away at $339,000.00 on 2.26 acres and the other at 2 miles away at 239,000 on 1.31 acres.
I found a for sale comp within 1 mile at $300,000.00 on less than a 1/4 acre.
Please advise after your review. I welcome any other help.
Thank you.
Wm Byrd
I forgot, the appraiser state the home to be valued at 244,000.00
We paid $195,000.00 in 1996 and made many improvements. Some as late as 6 months ago.
The appraiser state no improvements in 15 years.
Nuts!
I definitely think you should challenge the appraisal. Is the first floor below grade at all? Even a 6″ below grade?
The fact that the Tax Assessor states the home to be 3,269 sq. ft. and the the Insurance Company state the home to be 3,200 sq. ft. is not surprising, they simply have a different definition of how to count square footage.
The appraiser stating the home to be 2,100 sq. ft. may be accurate, at least according to Fannie Mae rules, but they should be giving you credit for a finished basement, or maybe calling it a finished lower level. It may not count in the Gross Living Area, but it should count for something, especially of the local marketplace has other homes like it.
If there are 2 bedrooms on the first floor, and its below grade at all, that could be part of the problem. If you have what you believe to be a 5BR/3BA house, but 2 BR and 1 BA is below grade, then the way the lending and appraising industry work, they are going to consider the house a 3BR/2BA with a finished basement. Again, if they are not giving you credit for a finished basement, then that would be an error.
You said you see what are minor adjustments on the comps for the lower level, maybe a finished basement may not be worth much in your market, hence the small adjustments. If comps are not an non existent issue in your area, it should be easy to prove that the “basement” (which in your case is really a lower level) is worth more than the small adjustments mentioned.
The fact that yours is an estate lot, and very private, on a 1/4 mile + paved drive in a heavily wooded area may not be a plus. If the comps are all in subdivisions, and there are no recent sales that are private estate lots like yours, that could be part of the problem. Maybe there is not readily available and plentiful lots that are situated like yours.
As far as no provision for view lots, there should be ‘some’ adjustment for view, but it may not be as much as you think. But it should be something.
You mentioned three homes under construction at over $440,000, but I am not sure they’d be considered comparable.
The appraiser using 2 comps that were listings was probably just an addition of extra data, they were probably comps #4 and #5, not his main comps. Sometimes an appraiser will use extra comps their listings to help support the three main comps that are settled sales.
I think there is something to what you say, and it is good to call the appraiser to task and ask him to explain his valuations and adjustments. But I also think there is a lot of detail at play here and that its hard to understand from the layperson’s viewpoint, and you have to remember that you are applying for a loan that they are trying to fit within a Fannie Mae/Freddie Mac box. And Fannie Mae/Freddie Mac have guidelines that are based on the lowest common denominator, and more vanilla property types. You should report back here on this page when the appraisal challenge is completed, and share the results of the appraisal challenge. I’m sure it will clarify things, but I do hope it is successful for you to some degree.
That is one more thing to hold the appraiser accountable for in the appraisal challenge. You can identify improvements that were made and can show receipts and invoices, so it’s impossible for the appraiser to say that no improvements have been made in the last 15 years. That may be worth something.
First of all thank you for this thread. I am trying to re-finance in washington state and they are saying 600 sq. ft. of my tri-level house (bedroom, living room and bathroom) are below grade. Our house is on a hill and the area outside of these living space IS excavated out above grade and landscaped and they are still calling it below grade WTF! We have a 2,250 sq. ft. house and they are comping it with single story 1,200 sq. ft. houses, frustrated is an understatement.
Sorry to hear about this Brie. This story seems to be getting more attention. Hopefully some of the folks who write the rules will apply some more logic soon 🙂 Good luck!
Moral of the story is, excavating May not do the trick :-/
Way too funny! In fact, I was actually thinking about doing something similar to a multi-level home. I was an appraiser for years, had a business in Ohio and in California, and this is what I was up against all the time. I felt so sorry for all the homeowners who were misled into thinking that there space below grade is onsidered as GLA. part of that stems for how the homes are listed, and the guidelines that are set forth for agents who are privileged to list them as such. It’s an unfair misrepresentation.
You are so right Aka! I still see it many times, where buyers are being told a home is 3,000 square feet, when its really a 2,000 square foot home with a 1,000 square foot finished basement. And knowing the realtors comp’d and priced the place using 3,000 square foot homes, and knowing that the appraisers are only going to use 2,000 square foot homes with finished basements as comps, always makes for a fun time 🙂
This has been an enlightening read!
I’m purchasing a home with 95% financing and the appraisal came in ….$70,000 lower than the selling price (300k)!! Not peanuts! No mortgage for me! Due to one corner of the first floor being a foot and half below grade. This is rural Pennsylvania and there are like, NO comps.
So, I’m going to “overpay” with a new mortgage and someday dig that corner out. Hopefully my excaving WILL matter in the future when I refi.
This has been an interesting experience to say the least.
Thank you for all of your experiences and insight. This is the best info on the subject I found.
Thank you Alyson, I am glad it helped clarify your situation. Good luck getting the place, and getting that corner dog out someday 🙂
WOW-well this just happened to me recently. I purchased my home 11/2014 square footage 2241 which had been assessed by the town with an appraisal well above what I paid-paying taxes on that square footage. I decided to refinance this year take out a small equity amount to do some updates. Quicken loans chased me down convincing me that my home estimate looks about $280,000 and I should have no problem -plenty of equity-zestimate showed $283,000 which showed my total square footage included on my original appraisal when I purchased the home. Quicken loans charged me $400. for the appraisal I had to talk them down from $500 they convinced me I would get that back anyway. So the appraiser showed up
checked out the whole house and finished basement that walks out to the yard. There are 2 rooms finished with closets and a large family room with a pellet stove. The appraisal came back lower than what I paid for the home and only showed 1441 square footage living space. When I discussed with Quicken loan about this they could not explain why. So now I can not continue with this refinance and I am out $400.00 dollars. I really feel this is a scam that everyone needs to be careful about. When I called my current mortgage company they told me they do not count the finished basement on the appraisal which does not make sense since it was included on my original appraisal when I bought the home. They could not comment on that.
Hello Joanne. I’m really sorry to hear about this. I think what happens is some appraisers catch it or are more strict with this rule, and some are not. My guess is that when you bought the house the appraiser and the underwriter were not as strict with this particular rule, but now when trying to refinance they are catching it. I have a client who I have tried to refinance and we tried 3 times over the last 5 years, and I guess the 3rd time is a charm, because now we have gotten the appraisal we need, and we are going to settlement. So you can try again with another lender and another appraiser, but may get the same result 🙁
I being curious about my home now that I have read everyone challenges. My home is three levels. All of the entry and exit points are on the first level including the kitchen, family room, living room, half bath, laundry room, and the garage. If I exit I can walk around the entire perimeter of my home. My home do sits on a hill with a retaining wall on both sides but this is to divide my neighbors yard from mine. If I try to get an appraisal will I be faced with this challenge?
P.S. I tried to upload a picture but was unsuccessful .
It sounds like every bit of your first level is above grade, so you sound OK. It’s only if any part of the first level is below grade that you have an issue, so it sounds OK to me. Feel free to email me a picture directly if you want me to take a more detailed book.
I’m running into this problem with a beautiful two story addition. The back elevation is at backyard grade. The other two sides could easily be brought down to grade. There is literally only 6-12″ of fill against the foundation, but the wall where it joins the house is actually lower than the basement of the old house. Does that mean even if I bring the grade down on the three sides of the addition, it is still below ground? Based on the grade at the front of the house which is probably 10-12 feet higher than at the backyard where the addition exit is? If so, it is impossible to ever get above grade.
Thanks for your informative site! Sorry for everyone dealing with this ridiculous problem.
Hello Keith. That sounds like a really unique situation, and a hard call. I think it would be a good idea to contact a local appraiser and ask their opinion on this. That is the opinion that counts most anyway 🙂 You may have to pay for them to come out and give you that opinion, but it sounds like it would be worth it to know. Let us know what happens, good luck.
Thanks Brian. The buyers appraiser came in $30K under the agreed price because I lost about a thousand square feet and a full bath and bedroom. We’re disputing it, but based on what I read here, I’m not hopeful.
Oh, I did not realize this was for a loan in process. The only thing I can think of is to do an “appraisal challenge” and see if you can find similar properties that have recently sold, with similar below grade square footage as yours, and see if those sale prices are comparable to what you’re looking for on the sale of your place.
There should be some exemption for split level homes. My home is 2700 sq ft split. It has 3 full baths and 4 bedrooms a family room and a den. The “GLA” is only 1703 sq ft with a 1000 sq ft basement. I had a recent appraisal and it was low ball. What is funny is that the house across the street is basically the same house, but his lower split is on grade – same plane as the front door. His GLA is 2700 sq ft and the tax value reflects that compared to mine. In the real world is there really that much difference in value? The issue is lazy appraisers that take the sq ft reflected in GLA and those are the comps they use instead of finding other splits or factoring in the bathroom and bedroom etc that are on the lower level.
I agree with you, I think the interpretation of the official guidelines is a little bit rigid. There should be varying degrees of response to this issue. You may luck into an appraiser that has a different interpretation than another appraiser, but that is potluck. Which is unfortunate. I wish I had a better answer for you, but I don’t. Good luck.
Here’s a question: for a split-level built into a slope, wouldn’t the majority of the house’s footprint be considered “grade”?
I am not certain on what your question means.
Did you mean, “wouldn’t the majority of the house’s footprint be considered “below grade”?
Or did you mean, “wouldn’t the majority of the house’s footprint be considered “at grade”?
But a split-level built into a slope is going to have a certain amount of the square footage be considered below grade since part of it is built into a slope. Or if you are saying the whole house is built into a slope, then that would all be considered below grade, and that may be a really tough house to comp, and to sell.
Thanks for the quick response, Brian! I wouldn’t say any of my split-level house is below grade. It simply follows the contours of the slope it was built on. How is it determined where on the slope would be considered grade?
If it follows the contours of the slope, then it should not be considered “below grade”. Below grade is “below ground”, and it sounds like you have no part of the house that is below ground.
Absolutely, Brian! Thank you. I brought up the subject in a Houzz forum last night. Could you take a look at the Houzz thread for a photo of the house and more particulars about my situation, i.e. county tax square footage versus appraisal square footage?
https://www.houzz.com/discussions/5219606#21945681
THANK YOU for your interest!
That was an interesting discussion in the Houzz forum. I’m afraid the bottom line is there are so many variables, and so many different players involved, from appraisers to underwriters to Fannie Mae regulations, that it’s just impossible to determine how this is going to play out for you in advance. Looking at the picture I can see how people would define some of your square footage on the main level as below grade. The one commenter that said not to worry and that it would be compared to other split levels is correct, but you were correct to counter that in a hot market with limited inventory, it might be hard to find proper comparables. The only thing I can tell you is to pay attention to whatever lender your buyer is working with. When you ultimately get an offer and you’re going to pick and accept a buyer’s offer, make sure that the lender is a local lender that uses strictly local appraisers, as local as possible. Hopefully a knowledgeable local appraiser will help diminish any problems you may suffer from.
I really appreciate your input, Brian. It’s all very fascinating, but at the same time, frustrating and confusing. I’m saving your advice about local appraisers and lendors. THANK YOU!
Hello,
Fannie Mae makes an inception to the rule for Duplex properties. There needs to be the same for Split Foyer and Split Level homes. It’s as simple as that. I have a Split Level Home that I did sell but my appraisal fell way below from where it should have been in value. A Split Level/Foyer property is built with the IDEA that BOTH levels are to be used as LIVING Space. We have one bedroom, bath, livingroom , and kitchen on the upper level. The two bedrooms, family room, laundry room, and bathroom are located on the lower level. There is Egress at the lower level. (A sliding door in the family room to the backyard) St. Louis County has said the bedrooms MEET the Municipality Codes as a Three Bedroom, Two Bath property yet, Fannie Mae says we have a One bedroom, bath property. I pay TAXES on a three bedroom two bath property, I have insurance for a Three Bedroom, two bath property. So, where does FANNIE MAE come off saying that a split level/foyer property should NOT include lower level living space? It does NOT make sense, and you can’t just DIG around your property as I was advised to make it a two level home. When doing so you can risk the Footing / Frost protection that is needed for the property. A Lawsuit should be filed against Fannie Mae for not making an exception for these properties.
Fannie Mae will allow this, you just need to make sure there are similar properties to your setup, in the same price range, that the appraiser can use as comparables. Then you’ll be fine.
I live in Pa and I see some home where the basements are listed in with the sq footage and some where it is not. I’ve asked realtors about this and they play ignorant but I will be selling in a year or two and want to know what is correct. The badement added in lowers the price per sq foot dramatically which entices buyers but is this ethical?
What is the rule or standard that should be quoted?
Thank you for your time.
Hello Victor. The technical standard is to NOT count a basement in the gross living area, period. An appraiser won’t do it, an underwriter won’t do it, regardless of what a realtor says or does. However, if you can find recent sales, that have below grade basements, that sell for what you are trying to sell for, then it should not matter how the realtor markets the place. It’s all about the comparables! Good luck.
I would bet if the appraised value had been where the homeowner & loan officer wanted it, nothing about the basement would have been an issue. Most homeowners do not have an accurate, unbiased perception of what their house is worth. And many loan officers throw as many “deals” against the wall to see what sticks.
I live in a condo (duplex) the lower level is finished and has daylight windows. there is 1 bedroom and 1 bath and a family room. It is considered as a 4 bedroom 3 bath condo, of which 1 bedroom and 1 bath is on the lower level. Is the lower level figured in the square footage of the condo?
If the lower level is above grade the square footage would be counted in the gross living area, and would be counted at the same value as the upper level. If the lower level is below grade to any degree, they value the below grade square footage differently than the above grade square footage. So the square footage would still count, it would just be valued differently when it’s below grade.
I have recently ran into this issue as well. Trying to refi, and above grade is valued at $150 per sf, lower level is valued at $30 per sf. Lower level is fully finished and 3 sided walkout with almost floor to ceiling windows and 4 exit doors. My question is about the duplex exemption. Our top two levels have 2 living areas, kitchen, 3.5 baths, 6 bedrooms, and a bonus room. My mom currently lives in our lower level, as an in-law quarters, with two living rooms, a bedroom, bathroom, laundry, a storm shelter. We have plans to make a complete kitchen down there, right now it has a stove and a fridge, cabinets are in there, but have not been installed. I wonder if we finish installing the cabinets and make the space a complete separate living space, would it qualify for the duplex exemption?