I have some experience with this, unfortunately. It will cost much more to build than to buy in this market, particularly if the market is as bad as you say. We too have found out that how much money you qualify to borrow (and how eager the bank may be to lend it to you) has nothing to do with whether the house appraises. Have you talked to the appraiser and shown him the sales you found? He could have missed them. Unfortunately, appraisals are based on what has sold, and if the houses are selling for 100.00 a square foot, then that is what your appraisal will be.

The builder will likely know how to cut some costs. The architect likely won't - not their forte. Size does drive costs to a large degree though. If you can make it smaller, do. If you can post plans here, folks may give you ideas to make it a more efficient house. There are some easy things to cut (like hallways), and ways to make a small room much more usable (taking into account pathways, number of doors, etc.).

Good luck!

One way for an appraiser to determine value is by analyzing the market and recent comparable sales. Another method is a "cost approach". When determining value it makes sense to use the cost approach, especially in this market. Your home is not a "distressed" property, therefore your home should not be compared to "distressed" sales. The exception would be if over 50% of the sales taking place in your area bank owned or short sales. If this is the case, the data cannot be ignored and does reflect the values of the entire area. Otherwise the appraiser should be able to come up with a value based on the land value + the amount it would cost to construct the home.

I agree totally kbabe - although some appraisers won't use the cost approach (or perhaps some banks?). Our first try was with a huge national bank. We appraised with a cost approach but our appraisal based on comparable sales was 2/3 the cost appraisal. The bank would only use the appraised value under the comparable approach - bank underwriting requirements. We actually would have over 40 percent equity in the house (own the land outright and putting another 20 or 25 percent down to lower or mortgage payment) and they still only could consider the appraised value. Here is hoping the local bank is different!

We went with a local credit union bc we have had great experience with them in the past, and we have good hx with them (2 paid off car loans, and a refinanced mortgage on our current house). In fact, when they appraised (different appraiser though) our current house last year, they assessed it at $25K higher than we paid 2 yrs prior to buy it. We have put a few improvements in, but no where near that amt. We did appeal the initial appraisal bc the comps they used we felt were not even close to our new build. AND they did not do ANY comparisons to new builds. There is actually a new build right around the corner from us, but he is using private funds and insurance money, as his previous house burned down. So even though he is building upwards of a 750K home (much higher than our proposal), they did not take that into consideration. Most of the recently solds were on less than 1/2 acre in a tract, whereas ours is 2 full wooded acres in a substantially more upscale "development." (Not really a true development, but a large area that used to be undeveloped and farm land that is slowly being parcelled off and built, all by various contractors. None of the comps had higher than standard 8ft ceilings. None had wood stained trim or upgraded windows. All were vinyl siding. None had any built-ins....we have several throughout. Ours has increased insulation (closed cell foam and blown in versus mainly fiberglass), high quality windows, 2x6 construction, stone around the entire foundation, etc. I found several recent sales in the $140/sq ft range but they said they "comped" the same, and really did not seem to take the price per square footage into consideration. They only gave us $17/sq foot for our 1590 sq ft basement, even though we pointed out that we were roughing that in now and finishing it (probably ourselves) within the year to include a media room and in-law suite. I was also very confused by several adjustments they made to the comps prices. For instances adding $2200 to the value of one bc it was on a 0.9 acre tract, when ours is 2 acres. ADDING $32000 to the same one bc it was 7 years old and not new?? Adding $44,650 to it bc it was 3 bed, 2.5 baths and 30000sq ft where ours is 5bes 4 baths and 3893 sq ft. Very confusing.

We did find one comp that is still for sale in a price range close to our cost to build (actually a bit higher) and similar in upgrades, etc they had this response:
"The above listing is a perfect example of an atypical over improvement for the area. The marketability is greatly affected. Price is discounted, marketing time is abnormal." The house has only been on the market for 30 days, so not sure how that is abnormal. Yes, the price is about $100K higher than the assessed price, but I thought the assessed price was very low for the upgrades they had done, and wonder if they did it on the "down-low" - i.e. not pulling permits, etc and never had it reassessed.

While the real estate market IS slow here (where is it not) there are still a fair amt of sales, and definitely NO WHERE near 50% of them being bank owned or short sales.

Here is a direct quote from the appraiser in response to our appeal with higher comps and pointing out all of our upgrades:
"The proposed construction is an over improvement for the area (super adequacy). It suffers from regression being the most expensive home in an area without a high degree of conformity to support the value. The cost approach may support the construction price, however due to the area and lack of supporting sales, the sales comparison approach will not support the construction cost."

The bank liason actually seemed quite surprised with the initial appraisal AND appeal. He also said due to industry regulations, they are no longer even allowed to order a 2nd appraisal.

I think part of the issue (why we are building in the first place) is that we have such specific needs and have found NOTHING existing that would satisfy those. We have NO plans of selling this house any time in the near (and by that I mean at least 15-20 years) future. But of course, the bank doesn't care about that. So, we are looking into how we can redesign our dream plans into a cheaper design. I will definitely post the plans here for input. I have posted them piecemeal up until now, but never the entire project. The original design had a steep A frame roof which we knew was a large chunk of the cost, so simply redesigning that would help, though not $100K of help. We are also going to sit down with our builder and find out what he suggests. Thanks for your input so far.

That is essentially what happened to us. They won't consider cost to build or anything other than SOLD houses. If nothing comparable has sold (our situation), you are out of luck. You are correct about the 2nd appraisal as well. Not only would we have had to pay for it, but you essentially had to show complete misfeasance (and we couldn't show it even though he missed 1000 square feet of heated square footage, two bathrooms, 400 square feet of basement (unfinished) square footage, and valued our lot at half the tax assessed value, even though a smaller lot (we have 2.25 acres, which is actually two lots we bought and combined, the other lot was .9 acres), three doors down, was valued at 15k above its tax assessed value (no difference in lot quality - if anything our is better because the comparable is on a huge hill with very little buildable area). In other words, I feel your pain!.

I remember the adding in thing and I think if I am remembering right, they are actually adding to your value and taking away from the other . . . in other words, youir house is given an extra 49k because it has extra beds and baths. Not the logical explanation from a lay person but that was how the appraiser explained it to me.

We are now with a local bank who has chosen an appraiser who specializes in higher end builds. We also have a loan requiring only 10 percent down so the appraisal doesn't need to be as high to get where we want. That is the other thing you can look at - the higher the down payment required, the higher the appraisal must be to get to your loan amount. So if you qualify for a loan with a lower downpayment, your appraisal requirements will be lower also. We will be able to borrow 90 percent of the appraisal amount this time, instead of the 80 percent we would have been able to borrow under the other banks loan. So the appraisal doesn't have to come in as high! Of course, you may end up putting in the 20 or 30 percent to make up the difference between the loan amount and cost (we will have to do that) but it is a way to make the loan work.

Again, good luck!

Athens mom - thanks for your reply. How did you find this bank with an appraiser like that? Did your builder recommend them? Our builder did suggest a bank another homeowner used, but their build was less expensive than ours too, so not sure it would make a difference. With only 10% down, are you required to pay PMI then? Thanks!

FiveunderFive,

We had the same issue it took us a year to close on a loan had 6 appraisals done only 1 came out to what our contractor had estimated on the project.

It was the most frustrating process (i wish i could say it gets easier when you actually start building it doesn�t) we took that year to finalize our plans and save more money and are now building and covering the difference from the loan and construction out of pocket.

The reason we are doing that is cuz we have very unique needs like yourself and have been looking for over 3 years to find a perfect pre built place and haven't come across anything we liked.

What�s really irritating is that when they look at comps in the area that we are building in which is all new construction "Custom" built homes that have never been sold they can't be taken into account. They only thing they factor in for those homes is the land value not the construction.

There are currently 2 homes listed on the same street as ours and if you look at a per square foot value they are priced about 25-30% higher then what our construction cost would have been but since they hadn't been sold they weren't taken into account for the appraisals.

If you look at the asses reports they are a joke and make your blood pressure sky rocket at incompetency that the entire process has now become.

sorry as you can see I�m still very bitter about the entire process.

Hope you have better luck then us.

One word of advice is try smaller banks that focus on just construction loans your builder should be able to recommend some.

My husband has his business banking with this local bank so that is how we ended up with them. They actually didn't have this 10 percent down loan when we first talked with them several months ago. It is a jumbo loan and they call it their preferred customer loan or something like that. It is an in house loan so no PMI. I do think it has a slightly (like an eighth) higher rate than their standard jumbo.

I just got off the phone with the banker wondering if we are tied into the 10 percent if our appraisal comes in higher. She said no - this is not a construction to permanent loan (they don't offer that) so it is our worse case scenario. She did say that if we wanted to go with their standard jumbo loan, the appraisal may or may not work based on the lack of comps since Fannie Mae is very strict on what they will accept as an appraisal. With an in house loan (i.e, one they are not going to sell), they have much more flexibility.

So we will see - like the banker said, they will get the construction loan approved with the 10 percent down and if we want to change down the road we can, but she did want us to know the appraisal may be an issue at that point as well if we decided to. She also said underwriting guidelines change every day and things could be much "looser" when we were looking at permanent loans.

"They won't consider cost to build or anything other than SOLD houses."

Maybe because if they have to foreclose they will have to sell it to try and recover the loan amount?

Brickeye - precisely, and I don't begrudge them that. I understand the rationale - it is just frustrating because we won't foreclose (building way under our means, enough liquid investments to pay for build (not willing to do this), husband owns his own business so no possibility of lay offs, I am a lawyer by trade but not practicing so I could pull off enough income to cover the mortgage, etc.). . . It just is frustrating for me (and for the bank I guess) when you know you are a great credit risk and the house won't appraise. We live in a small town and are building above the market - we know that and are fine with that. Our house is not an investment. We will be happy to break even in 30 years plus when we sell it. We just want to build it, enjoy it for 30-35 years and pass it along to someone else :)

Five - I have posted on our similar situation, which is common across many housing markets. As we found out and others have noted, once a valuation has been made by the appraiser, they will not change it regardless of the validity of your challenges. My advice to you is if you don't have to build at this time, then you might want to wait because it sounds like there is little chance you can get a decent appraisal in your market at this time.

Athens - I am concerned with your "this is our worst case scenario" comment. If you are only getting a construction loan and will have to convert it when you take occupancy, you will have to get a new appraisal and it could come in lower requiring you to come up with the difference in cash at closing. Some markets may not have yet bottomed out, as scary as that thought is. That seems like the worst case scenario to me.

We may have lucked out and found a local bank that will use our original appraisal, but we will be paying a much higher interest rate.

Best of luck to all; this is a crazy time to try to build.

There are really no comps so the appraisal is essentially a cost to build one. We live in a small town and there are few houses like ours, and the ones that exist were either built and occupied by the original owner, or are occupied by folks who will sell 20 years from now. They just don't trade hands very often.

This is a local bank and they really want to make the loan and are keeping it in house. They don't do a second appraisal, really. Basically the same appraiser goes out and double checks to see you build what you said you were going to - i.e. same number of bedrooms, baths, rooms, etc. The banker said it is really a formality. The only hoop to jump through is the first appraisal. . .

The key is finding a bank (if you can) that will keep it in house (i.e., not sell your loan on a secondary market). There are banks that will do this, but usually these types of loans require that you have a lot of assets (and a good chunk of them liquid or accessible)), plus excellent credit. If you meet those requirements, you might be able to work it out. These requirements are in place, I presume, because the bank is the one taking the risk on the loan since they are not selling it, and if they are being more flexible on the appraisal they have to find a way to protect themselves.

The national banks have these sort of things too (we did this this first time around), but we found NO flexibility on the appraiser and no control over the appraiser by the bank.

The local banks have a smaller pool of appraisers (the bank we are using has 5). Another local bank told me that they rotate in a particular order so she can time the submission of the paperwork to get the most appropriate appraiser (i.e., if you are appraising a farm, it goes to the farm guy, tract houses go to another, large homes/estates go to another, etc.).

Good luck and don't get discouraged! At least you know you are not alone ;)