Should I have an issue with my appraisal?

[eazye]

Ok, I am going to start this off by saying that what a custom house costs to build does not mean that is what it is worth, I get that and fully understand that reasoning. But, we are doing a custom built 2400 sq/ft home in a somewhat rural area and everything was approved pending the appraisal. Well, the appraisal came back $15k less than the cost to build. This appraisal includes the 2 acres we already owned for the past few years which he valued at $30k. That means he valued the structure at $50k under the $295 cost to build. This appraisal was started on Monday, July 22nd in the AM and was turned into the bank by that same afternoon (seems a little fast for me) because he didnt touch it for the first 2 weeks he had it. The bank had to inquire on the 22nd as to why it wasn't done and that is when he started it.

I would say I understand but the base price plus cost of items to put the house on the land (well, septic, driveway, etc...) cost more than the house as it was appraised with its upgrades. Basically, a completely stripped down house with zero upgrades and no appliances doesnt appraise high enough.

In this area, we have NO COMPS at all because it is a farm community and the only way to get land is pretty much to be a family member of a farmer or have lived here for a long time already. People don't move out of the area and houses do not sell. We are less than 30 min to large work locations, 10 miutes to good shopping, but have privacy due to most homes having at least 2 acres.

The comps he used were very strange. We are kind of in the corner of a county that has lots of development and ammenities (as mentioned before) but his comps went the opposite direction, some to the distance of nearly 20 miles out into the middle of BFE that is not convenient to anything. We are 1/2 a mile from the neighboring county and he would not go into that county for comps. The closest comp was 7.5 miles away, was 600 square feet smaller (1800 sq/ft) and it was a log cabin that may only be 2 bedrooms. All were completely base exteriors, not one of them even had shutters or any brick/stone work on them. Ours is a full craftsman style home with stone water table across the front, a 30 ft wide porch with stone and wood pillars, and the gables have shake siding on them (we got no credit for the exterior upgrades). All comps were 10 years old or older also.... I dont believe we were given any consideration for the hardwood floors or the maple kitchen either (not sure if that really appraises better or not).

We were doing a split loan where we brought 11% to the deal (in our land equity) and then we did an 80% loan and a 9% loan to avoid PMI. With this appraisal we lost all equity in the land plus we are still $15k under build price. To qualify for this loan, we have to bring an additional $50k in cash, basically, we need between 30%-40% down to build this home, or any home for that matter the way this guy appraised the new construction.

Sorry, hopefully you got through that mess and can answer this.... Am I just mad for no reason because I feel this is an incorrect appraisal or does my frustration have merit because of how the appraisal was completed?

 

[Michigan CG]

Ok, I am going to start this off by saying that what a custom house costs to build does not mean that is what it is worth, I get that and fully understand that reasoning. But, we are doing a custom built 2400 sq/ft home in a somewhat rural area and everything was approved pending the appraisal. Well, the appraisal came back $15k less than the cost to build. This appraisal includes the 2 acres we already owned for the past few years which he valued at $30k. That means he valued the structure at $50k under the $295 cost to build...........

Custom built sometimes means you are including things that some people would not include and are paying a premium for.

I work in an area similar to yours from what I can tell.

The cost to build your home is $295,000 with a land value of $30,000 for a total cost of $325,000 which is $135/Square foot. The appraiser came back at $280,000 for a value of the total proposed property or $117/SF which is 13% below your "cost".

Go to the nearest subdivision where they are building houses are see what they are selling for in terms of $/SF. Interview the builders and ask them what their "mark-up" or profit is on those houses.

Then look at your sworn statement which is the breakdown of the costs to build your home and look for the "overhead" or builder profit line or something similar to that. Does it compare to the profit that the builders are getting? In other words how much is your builder charging you to oversee the construction of the home?

This appraisal was started on Monday, July 22nd in the AM and was turned into the bank by that same afternoon (seems a little fast for me) because he didnt touch it for the first 2 weeks he had it. The bank had to inquire on the 22nd as to why it wasn't done and that is when he started it.

This means nothing. I do a lot of new construction appraisals and the visit to the property is a very small part of it. The plans and specs are the meat and potatoes. He could have had most of the report written before he ever wrote the report and had the land sales for his land value in his files. Taking pictures of your vacant lot is something he could have been doing to finish the file. He may well have done a lot of work before then.

I would say I understand but the base price plus cost of items to put the house on the land (well, septic, driveway, etc...) cost more than the house as it was appraised with its upgrades. Basically, a completely stripped down house with zero upgrades and no appliances doesnt appraise high enough.

Not to be sarcastic, but in case you haven't read a newspaper in the last seven years the values of homes has dropped in the country 10%-60%. Let us assume that you live in an area like mine and home values dropped from 25%-40% from 2007-2010. In my area new construction dropped 96% from 2005-2008 because the cost to build a home was more than it could be sold for.

In my area land values dropped by ~60% in the same time frame. The only reason there is building in subdivisions now is because the builders bought the subdivision land for pennies on the dollar. Is anyone else building a home on an acreage where they have to put in septic and well? A septic system can cost $10-$20,000 around here and a well typically runs a little under $10,000. The subdivision builders already have city water and sewer at the street and the costs are significantly less.

In this area, we have NO COMPS at all because it is a farm community and the only way to get land is pretty much to be a family member of a farmer or have lived here for a long time already.

I seriously doubt this. Go to your county and ask for a list of land sales under 10 acres in the last two years. I bet there are plenty of them. If there aren't then it tells you that there is NO MARKET for vacant land. If you haven't done this you cannot make this statement.

People don't move out of the area and houses do not sell.

Sorry, I don't buy this either. Go to the county and research the number of homes that have sold in the last two years that are not in a subdivision.

We are less than 30 min to large work locations, 10 miutes to good shopping, but have privacy due to most homes having at least 2 acres.

I live an area like that and have appraised homes on lots of 0.20 acre to house on 50 acres this year. There are home sales.

The comps he used were very strange. We are kind of in the corner of a county that has lots of development and ammenities (as mentioned before) but his comps went the opposite direction, some to the distance of nearly 20 miles out into the middle of BFE that is not convenient to anything. We are 1/2 a mile from the neighboring county and he would not go into that county for comps. The closest comp was 7.5 miles away, was 600 square feet smaller (1800 sq/ft) and it was a log cabin that may only be 2 bedrooms. All were completely base exteriors, not one of them even had shutters or any brick/stone work on them.

I can't comment, I don't live in your area.

Ours is a full craftsman style home with stone water table across the front, 30 ft wide porch with stone and wood pillars, and the gables have shake siding on them (we got no credit for the exterior upgrades).

The job of an appraiser is to tell the bank what the house is worth if they owned it TODAY. Would a similar home to yours with a full brick exterior sell for a similar price as yours with pillars and a stone water table (whatever that is)? You want those things, is the market willing to pay for those "upgrades?

We were doing a split loan where we brought 11% to the deal (in our land equity) and then we did an 80% loan and a 9% loan to avoid PMI. With this appraisal we lost all equity in the land plus we are still $15k under build price. To qualify for this loan, we have to bring an additional $50k in cash, basically, we need between 30%-40% down to build this home, or any home for that matter the way this guy appraised the new construction.

You want to build a custom home with only 11% down? Most people I deal with are building custom homes with at least 30% down. Would you lend YOUR money to someone building a custom home with only 11% down and assume all the risk associated with it? I would hope not.

Sorry, hopefully you got through that mess and can answer this.... Am I just mad for no reason because I feel this is an incorrect appraisal or does my frustration have merit because of how the appraisal was completed?

Until you do your homework you have no right to be mad. If nice homes are being built in your area for $100-$115/SF like they are in my area then why is your house worth $135/SF?

 

[Meandering]

In this area, we have NO COMPS at all because it is a farm community and the only way to get land is pretty much to be a family member of a farmer or have lived here for a long time already. People don't move out of the area and houses do not sell.

What's the market value, when there is no market?

Would out of area people move there to be out of place with everyone else around them?

Market value is what a typical buyer will buy it for. You are telling us, there is no such a thing as a typical buyer for your location.

LOCATION, LOCATION, LOCATION.

That's the second main consideration in a lending appraisal.

The first consideration is that the appraisal was performed for a lender, and lenders have rules that appraisers must follow, one of which, might be that the comparables all be from the same municipality, and that's why the appraiser did not go to the next county for comps. Also, lenders are not particularly interested in what something costs you. They are more concerned with what they can resell it for. Do Maple cabinets garner a price premium in the resale market over oak cabinets? We don't know, but without market activity in your area, it's much harder to peg that down, if, it could be pegged down.

There are many issues like that when you choose to build in a very stable area. Very stable areas are not well favored by lenders, probably because they are not making much money there and values have to be interpolated from other areas. Lenders don't like that. They like lots of market activity close by the subject property that is recent and on-going. They don't really care if buyers will pay a premium to live in a stable neighborhood, because they have a hard time proving that without market data. It's a double edged sword they wield.

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[JTip]

You are just mad because you can't get a loan that is most favorable to you while building a home specific to your desires.

Custom built sometimes means you are including things that some people would not include and are paying a premium for.

Exactly.

I am going to start this off by saying that what a custom house costs to build does not mean that is what it is worth, I get that and fully understand that reasoning

I sold tires back in college. Kids would come in the shop with $1000 cars and put $2000 wheel/tire combinations on these cars. Do you think the car is now worth $3000???? Another $1000 in the in-dash system and kicker speakers....We now have a $4000 Chevette now???? no. I'm glad you understand, makes things easier.

You are obviously doing well in life, hence the rural custom house. Bring money to the table or pay PMI or buy existing construction in town for a favorable mortgage payment.

To answer your question: Yes, you are mad for no reason.

 

[Mark K]

I work in an area that sounds similar to yours. I've had the misfortune to appraise three new custom homes in the past couple of months and all of the appraisals left the homeowners less than pleased (oh well). All were in suburban/rural areas.

#1 cost, including land, was over $800K, appraised at $600K.
#2 " ", over $600K, appraised $475K
#3 " ", $475K, appraised $400K.

All had custom features (specific to the owners) that were very high quality, probably too high, and the owners didn't understand why the next owner probably wouldn't place as much value on them as they did.

One had over $75K in covered porches, including a covered rear porch with a large stone fireplace. Another had over $40K in dark, almost black, hardwood flooring. Another was self-designed by the H/W and they thought it was the most special home in the world. I thought that maybe a 10 yr. old had drawn up the plans.

Also, the value of all of the fancy exterior features is generally lost on people that want to live in rural areas. Keep the house simple and build a nice pole barn; now that adds value.

I've also found that the number of buyers for the surburban/rural custom home buyers has fallen significantly in the past few years. This seems to go on a cycle of maybe 10 yrs around here. For a while everyone wants to move to the country, then for a few years you can't give away a rural property.

People that move there or have lived there for a while can't seem to come to grips with this phenomena but it exists. Not everyone wants the extra work and headaches that come with rural property. Personally I've lived in a custom home on 5 ac. for 30+ years; I'd trade it for a condo in a high-rise tom'w if I could convince my wife. I'm sick of it.

As you said, there are no sales but in spite of that you don't like those chosen by the appraiser. Maybe they're the best available? I didn't like the comps I put in the above mentioned reports either but that's all there were.

BTW, the loan originators in this area tell people that if they don't have at least 30-40% down of this type of new construction that they will likely have problems with the loan.

 

[eazye]

Ok, I think my post may have come across as a little harsh, I am noy "angry", maybe just more confused. I really do understand that the cost to build is not equal to market value. We did not really do any crazy upgrades either but the appraisal on the structure zapped out the $30k equity it gave us for our land and then zapped another $15k out of the structure.

I am just a little shocked I guess because we have friends who are building with the same builder (2 towns away where our nearest comp was located) with nearly equal upgrade costs rolled in, both require at least 200 ft driveways, wells, septics (they needed a more expensive septic like we did), etc, plus they rolled their land purchase and a $16k appliance allowance into their loan and their appraisal came out higher than their cost to build. Their home is a 3 bdr, 2.5 bath home as well, same as our home.... They probably appraised at least $60k higher while only being about 200 sq ft larger.

We have a plan we like that is larger too, if it means moving up in size then we may need to do that but to me but just doesnt make sense to have to do that. I am also surprised that he would not go into the neighboring county to get comps since it is only 1/2 a mile away. Instead he went out nearly 20 miles into an extremely rural area, Amish country, to find comps. I guess I dont understand how appraisers, bound by the same rules and guidelines can have such large swings in appraisal opinions.

And the comment about how he was probably working on it longer, I dont think so, he was sent the information on July 1st and on July 15th, he called me, the builder, and the bank to get the info on the house because he said he never received any of it and had tried the entire week before to get it but got no response from anyone. When I returned his call on Monday the 15th and got his voicemail, he had not changed it from that week prior when said he was on vacation from July 8-12th and would return calls on Monday the 15th when he was back in the office. When the bank inquired about it on the 15th, he said he just received the info from the builder and he would start on it. He turned it in to the bank that same day. So, this makes me believe he had it put together in less than a day....

Really, I am not blasting appraisers here, that is not my point and not what I came here for. I was looking for guidance on how it appraised and the comps that were used in the process. The nearest comp size used was 10% smaller but 17 miles away, and the one was 25% smaller which had 2 fewer rooms, only 2 bedrooms, and it was a log cabin. The closest in age was 10 years and the oldest was 15 years. Would you guys use comps this much different for an appraisal just to stay within the county or would you venture out of the county which is less than 1/2 a mile away to find comps within 1-2 miles?

 

[eazye]

What's the market value, when there is no market?

Would out of area people move there to be out of place with everyone else around them?

Market value is what a typical buyer will buy it for. You are telling us, there is no such a thing as a typical buyer for your location.

LOCATION, LOCATION, LOCATION.

That's the second main consideration in a lending appraisal.

The first consideration is that the appraisal was performed for a lender, and lenders have rules that appraisers must follow, one of which, might be that the comparables all be from the same municipality, and that's why the appraiser did not go to the next county for comps. Also, lenders are not particularly interested in what something costs you. They are more concerned with what they can resell it for. Do Maple cabinets garner a price premium in the resale market over oak cabinets? We don't know, but without market activity in your area, it's much harder to peg that down, if, it could be pegged down.

There are many issues like that when you choose to build in a very stable area. Very stable areas are not well favored by lenders, probably because they are not making much money there and values have to be interpolated from other areas. Lenders don't like that. They like lots of market activity close by the subject property that is recent and on-going. They don't really care if buyers will pay a premium to live in a stable neighborhood, because they have a hard time proving that without market data. It's a double edged sword they wield.

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I get what you are saying, it probably is a tough place to peg a price on a home because there are no comps available. A friend who lives about 1/2 mile away has a home that is nearly identical to what we are building, within probably 20 sq ft, 1.5 story home, large front porch, and stone and vinyl exterior. When I do a sales search on our county auditor website for comperable sales, you have to do +/- 400 sq ft and go back 10 years on sales to get any in our school district. His 10 year old house would be a comp but it has never sold, he built the home....

We do have a lot of new construction, within the last 5-10 years but it is mostly the people my age who have returned to the area they grew up in and already had ties to the area and ways to get land. The farmers are very protective and will noto sell to developers to put in developments. So, the area is filled with 50-100 year old homes and homes roughly 10 years old because of the farmers controlling the land sales.

Problem is, the older homes are very conservative homes and are in that 100k-150k range. The people returning to the area are people like myself, mid to late 30s, college grads, who have worked their way up. The new homes being built are in the range of $250k-$600k. But, again, they dont sell because people move here with the intention to start and raise a family with stability in a very good rural school system.

Also, the bank is not happy with the appraisal and do not know why the appraiser stayed in the county and would not cross the border into the neighboring county, it is not their policy. My broker at the bank disagrees with it as well and is taking it to his management to have the bank pay for a new appraisal. He looked at the comps used and was surprised they were even considered. At least it will not cost me another $400 since the bank said they woudl cover it!

 

[eazye]

Until you do your homework you have no right to be mad. If nice homes are being built in your area for $100-$115/SF like they are in my area then why is your house worth $135/SF?[/quote]

The appraisal listed two of the comps selling at prices that put them at $140/sq ft and another at $149/sq ft so essentially my new home is coming in with a much better $/sq ft ratio. Even if they appraised my home at $345k it still fits between two of these comps at $143.50/sq ft.

 

[Michigan CG]

..... the appraiser stayed in the county and would not cross the border into the neighboring county.......

That could be your problem. If the appraiser doesn't have MLS access in that county he can't look up sales there. I would say that if he is appraising a home 1/2 mile from the county line then he needs to have access to the neighboring county.

More homework.

 

[Meandering]

I get what you are saying, it probably is a tough place to peg a price on a home because there are no comps available. A friend who lives about 1/2 mile away has a home that is nearly identical to what we are building, within probably 20 sq ft, 1.5 story home, large front porch, and stone and vinyl exterior. When I do a sales search on our county auditor website for comperable sales, you have to do +/- 400 sq ft and go back 10 years on sales to get any in our school district. His 10 year old house would be a comp but it has never sold, he built the home....

We do have a lot of new construction, within the last 5-10 years but it is mostly the people my age who have returned to the area they grew up in and already had ties to the area and ways to get land. The farmers are very protective and will noto sell to developers to put in developments. So, the area is filled with 50-100 year old homes and homes roughly 10 years old because of the farmers controlling the land sales.

Problem is, the older homes are very conservative homes and are in that 100k-150k range. The people returning to the area are people like myself, mid to late 30s, college grads, who have worked their way up. The new homes being built are in the range of $250k-$600k. But, again, they dont sell because people move here with the intention to start and raise a family with stability in a very good rural school system.

Also, the bank is not happy with the appraisal and do not know why the appraiser stayed in the county and would not cross the border into the neighboring county, it is not their policy. My broker at the bank disagrees with it as well and is taking it to his management to have the bank pay for a new appraisal. He looked at the comps used and was surprised they were even considered. At least it will not cost me another $400 since the bank said they woudl cover it!

So,

In an area that has no typical buyers, where anyone moving into the area has to have that special pass to acquire land to move there, you are looking for market value.

You are translating market value into "an appraisal that's at least the cost of construction but hopefully more because you already owned the land".

Suddenly it's okay to shop appraisers and extend neighborhoods to "find the value that fits the costs".

You're lucky I was not the appraiser.

If no one has sold any land on the open market with adequate market exposure in an arm's length transaction, in the past 3 years and every land purchase was by a relative or former neighbor, you are building a home in a closed society that has restricted the market to members of the approved club.

Your bank should not even bother. They can hold the loan in house and go with a cost approach only. Of course they would have to have the land value interpolated from some other neighborhoods. Yes they can do that. I'm sure they did not tell you that. Because they want a GSE compliant appraisal so they can sell your loan to the secondary market.

Extending the neighborhood into a different county with different taxes, different politics different school districts, is risky business for residential appraisers.

But hey, you need that loan to finish your dream house.

We get it.



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