Be very careful about the appraisal values that the banks come up with. The last project we did the appraisal for the construction loan came in low and that was all the bank would give. The owners were able to make up the difference, but it caused the project to drag on as they struggled to come up with the money needed. When the time came for the loan to be converted the bank came back again with a low appraisal. This was in a NE high end area, but the bank would not budge. The owner hired 2 private appraisals and presented them to the bank and they did raise the amount of the final loan. The final mortgage was still low considering the house that was built. Do not start construction without extra money if the construction loan is not sufficient to build the house. If the house drags on the banks will foreclose on the construction loan after a set period of time. Banks gave money away 6 years ago, but now they undervalue all houses to protect themselves. Lastly most construction goes anywhere from 10-20% over budget because of upgrades or items forgotten about. If you have a tight budget be very careful before you start.

Oh yes!!! Our house appraised the first time for several hundred thousand (you read that right!) less than the estimated cost to build. We live in a small town with few comps (really none since the houses like ours that people live in tend to be long term homes so very few sales). We owned the lot outright, which means it appraised for around half of what we would have in it!

We ended up having to switch banks. Found a friendly local banker who had a friendly appraiser and essentially asked us what we needed it to appraise for. They could do this because they were not selling the loan, apparently. We still ended up putting down around 30 percent, not including the value of the lots which adds another almost 10 percent. Hopefully this means we won't have an appraisal issue at the end!

It is very frustrating and it seems like many people are having to put down much more cash than they expected to build.

You have the housing market collapse to thank for the appraisal issues so many of us have seen. For whatever reason, the appraisals through the bigger banks are very low and the appraisers seem to only use the lowest comps they can find and ignore the higher ones. Nothing you can do about that except to request a new appraisal (that the bank may or may not decide to use) or seek out another lender.

It's interesting that the appraisal doesn't include the land. If no land is included, how did they price out the comps? What kind of value did they give the land the comp houses are built on? That could be where some of the appraised value difference came into play. Keep in mind, too that once construction starts, the bank now has a right to your land in the event of foreclosure as that's where the construction that they lent on is. Additionally, the land can be used toward your down payment (provided you meet the bank's ownership criteria). So if you have cash money set aside for the down payment, you may be able to use those funds to help increase the overall down payment on the project (and hopefully close the gap between appraisal & cost to build) and get the loan approved. When you take out the permanent mortgage, the land the house sits on (even though it's paid for in full now) will be mortgaged. The land should be included in the appraisal for these reasons.

If you are dealing with one of the bigger national banks, I would also suggest exploring other more local lenders. We tried to build ours through our regular bank, but like you, the appraisals were VERY low. We were referred by a friend to our local Farm credit office and everything went smoothly.

Here's a link to more info on the land situation and down payment (scroll all the way to the bottom--it's the last topic)...

Here is a link that might be useful: Land as Down Payment

This has been a concern for us as well. Once the construction loan appraised we felt better that the permanent loan will appraise but still some uncertainty.

the appraisal did include the land - think the total appraisal including approx 9 acres was $330k (I won't have a copy until tomorrow) so if we built it for $330k - although we have a stash of cash, our equity in the land gets zapped by the low appraisal (i view the equity in the land almost the same as cash in the case as both would go against the loan).

as another poster has mentioned - our biggest concern is what happens on the permanent side as I think our small town bank doing the construction loan can fi-nigile the numbers - but dont want to get caught scrambling in the end.

we have land financed through farm credit currently so if we don't make much progress in the near term, we may go back to them (we approached them initially yet, they mentioned their policies have changed so much that they dont do many residential loans any more)

thanks all the way around...

Banks used to have trusted/regular appraisers they hired. Now they have to go through a middle man who randomly assigns the job to a large list of appraisers. We are refinancing and the appraiser was not from our area. The comps were a joke and they came in low. If I placed my house for sale today at the price they came up with I would get multiple offers in the first hours of showing it!! I would also lose about $700K! We have plenty of equity so refinancing wasn't a problem, but the appraisal was a joke.

To clarify, we would be underpricing the house by $700K if we used the appraisal numbers.

Yep... there were so many corrupt appraisals that it's now regulated that the appraiser is assigned at random from a large pool. I remember the appraisal for the house I bought in 2004 coming up EXACTLY at the number we needed. What a racket they had going (banks, mortgage brokers, appraisers, etc.)!!

We just went through this a few weeks ago but we lucked out on the other end. Our appraisal came back 75% higher than construction cost so it does happen. I feel very lucky and blessed.

Yes, that happened to us too. There are no comparables in our area which really affected our appraisal. We own our property ($475K). Our cost to build is $1.4mil. Our appraisal (new house + land) came back at $1.1mil so we are only eligible to borrow $880K. The bank also wanted to know that we had an extra 10% available for cost overruns. You need a lot more cash available to build than people expect. Luckily, we are still building (but not for resale, haha!)

We had a problem with the appraisal with the first bank we tried to get a contruction loan through. We ended up going to a different bank and didn't have any problems at all. (Well, it was a complicated transaction which caused lots of confusion and took forever to process, but the appraisal part was easy!) We were very concerned for a while after the first bank's appraisal was so far off since there aren't many banks issuing construction loans, but our builder was able to point us in the right direction. I hope you can find another bank to work with!

You may want to go back to Farm Credit--from my understanding, on the construction side they use an in-house appraiser. For the permanent loan, it can go through Country Mortgages/AgFirst. The loan policies that changed with them in our area was that they no longer do jumbo loans and there is a certain ratio of value between house and land that has to be met. In our case, we ended up with 2 loans--the permanent mortgage through CM/Ag1st on the house & 18 acres and then a separate land loan through Farm Credit for the remaining acreage. What's nice with them is that they are able to work with you and have many more lending options than the regular banks. For instance, when you take out the construction loan, FC can put all your land under that loan so you will only be required to pay interest every month. After the construction is completed, if you only need to borrow $417K then everything can go under the permanent mortgage. If your total loan needs to be higher than $417k, they can finance the house and some of the acreage up to $417K, then do a land loan on the remaining acreage. I don't know of any banks that will do this. Definitely worth checking into again.

Sorry--that should have said, "...they (Country Mortgages/Ag1st) no longer do permanent mortgage financing on jumbo loans and there is a a certain ratio of value between house and land that has to be met." Note: Those changes did not affect the FC side of the house--they can still do construction loans higher than $417K.

Construction loans are not sold into the secondary market normally, but held 'in house' by the originating lender.

When the loan is converted to a conforming loan it can be sold into the secondary market.

Jumbo loans are another ball of wax.
The jumbo refers to them being larger than the conforming limit.
The secondary market is very limited for them, meaning the bank may have to hold them.

We are noobs embarking on our first custom build.

We're thinking of building in a subdivision where all the houses are custom.
However, they obviously are different sizes, bedroom #'s finishes, & prices.

We'll probably be the lower end cost wise in the community. The houses in this community are all build within the last 5-6 years but outside this development the houses are older - some a lot older & not as modern...

Question for you all - how will the bank appraiser know what the comps will be?

We are afraid he might step outside the community gates & grab an older less modern 4/3.5 house & appraised it down to that level.

They look at similar sized houses with a certain mile radius (and, hopefully, with similar amenities) that have sold recently. If I remember correctly, it was a 2 mile radius for the appraiser/bank I used.

In our area, there weren't many (any?!) comps because it's a small town with a huge variety in house types, lot sizes and view lots. They had to do the best they could with what was around. I helped in that process, although probably only because we are in a rural area. I ran the MLS sold houses locally and found my comps.... when the appraiser said Houses A, B and C were the best comps, my realtor was able to show the houses I'd found (Which were actually more comparable with higher selling prices.) In the end, our appraisal was under the build price, but that was to be expected all along.

Farm Credit appraisers can also be independents. Our appraiser is not an FC employee. I have to say their construction / permanent loan process is great. We are very pleased with the service, though that is very dependent on the loan officer.

Thanks for all the replies -- we are going to have a good sit down with everyone at the first of next week...I understand an appraisal is one person's opinion and they can pull the comps they want/the ones the find...but this goob miscalculated the heated and cooling sq ft by 200ft (over) and missed the exterior sq footage by almost 1000 (under). I honestly don't want to even give him the chance to rework it up.

We had loads of mistakes too in our apprasial. We were with a national bank, local branch. It is not as easy as saying choose someone else - this guy doesn't know what he is doing. Apparently, there have to be egregious errors, and miscalculations that he can easily rectify don't count. At least that is what I was told. Our guy refused to make any changes, other than obvious ones (missing bathrooms, missing square footage, etc.), but disregarded several more appropriate comps our (very experienced) real estate found that he had missed. To have switched apprasiers would have required many steps above our mortgage lenders head, going out of his office to the regional people, etc. So they lost the loan. It was very very frustrating because we were putting 40 percent down on the house, if you include the land which we own outright.

Sitting down is a good first step, but I would also have a real estate agent look at the comps the appraiser found and see if he is missing any. This is the easiest way to up the appraisal. Our appraiser included as a comp a house my builder built 3 years ago as a spec house. It was listed for 1.2 million for over a year and sold for 800k. That was much less than the other spec house he built in the same subdivision, listed for 1.2 and sold for 1.2. You can guess which comp they used. . .

We had the same issue with our appraisal. It worked to get the loan done but made things very complicated. Not only was he NOT from our area, he used comps that were in a different town, different school district(which ours is more sought after than the area he used). He used one comp down the street that was over 15 years old and said it had a 4 car garage but it only has a 2 car with an outbuilding and he adjusted OUR price down from that sale price!!! I am experienced in real estate and the comps used were HORRIBLE! But we didn't want to pay for another appriasal and risk it being worse and since this one worked for what we needed, we went with it.

Even my loan officer who used to be a realtor and an appriaser said our house was undervalued. Once she saw the final product she was amazed how how low the appraisal was and that it didn't change from the original construction loan appraisal. But just remember, even if the appraisal stinks but it still gets you the loan you need, who cares.

We have almost everything ready except the appraisal, which is the nerve-racking piece. Our lender suggested us not to start applying for building permit etc until the appraisal comes back so that we won't lose any money if the result comes back unpleasant. However, this will likely drag the process for another 2-3 weeks but it's safer to wait than risk.

Did most of you wait till you get the appraisal before you get your builder to start applying for permits or you had both going on simultaneously? How long did it take you to get your appraisal back?

Opposite for me. We appraised $150K over what it cost us to build. FWIW I was the GC, painter, clean up crew, etc....