I can't speak to what will happen, but I can say based on experience that they do reappraise (Wells Fargo sent out a different appraiser each time) and they do base it on current value. So, if values (comps) go down your value goes down, even if you did everything right. My appraisal went up, but I finished over 3 years ago.

I'm so sorry to hear about your stressful situation!

We've had a situation come up with our bank that shocked us, too, but it was a bit different. Still, it illustrates just how ultra-conservative the bank underwriting is. We can all debate whether or not that's a good thing (to some extent, of course it is), but still, when it happens to you mid-stream when you thought you had one deal and you get handed another, it's beyond frustrating and can be downright scary.

In our situation, we bought a "fixer-upper" last August and paid $1,100,000 for it. We debated about how best to pay for the construction, but since we have healthy savings we thought it was best to take out a mortgage for $550,000 (because the rate was so attractive; otherwise we might have bought the place with cash and then maybe financed part of our construction just so we wouldn't have so much cash in our home). The property was appraised by the bank at $1,100,000, exactly what we were paying, so all was fine and the mortgage was approved without a hitch. On the appraisal the house is valued at just under $200,000 and the lot is appraised at just over $900,000. So clearly the value is in the land (not surprising since we're on the coast with an ocean view in an area of still very expensive properties where prices have declined only slightly).

Anyway, in the process of doing our paperwork with the bank's mortgage loan officer, we all discuss many times that the house is a great fixer-upper, and how exciting it is that we're going to do a complete renovation etc, etc...so, clearly he is well aware of our construction plans. We even discussed with him the possibility of financing the construction instead of the mortgage and other ideas...all the way along it was CLEAR that we were doing a down-to-the-studs remodel/addition.

Okay...so maybe you can see where this is going? In four months, our architect gets our plans done, plans are approved by the City, we hire a GC, we've got a rental house to live in during the construction, and one of the last things on my "to do" list before demolition was to take out course of construction insurance. Well, in the process of taking out course of construction insurance, the insurer asks me if our mortgage lender wants to be listed on the policy...I assume so, but I call the bank, find someone in the right department, and ask if/how they want to be listed on the policy. Of course they do, but more importantly, I get a call that afternoon from their VP of Risk Management telling me we must halt any plans for construction/demo and all plans must be pre-approved by her committee before we proceed with "destroying the bank's collateral." Huh? There was never any mention of this when we were signing loan documents, telling their loan person that we were going to tear the house down. Plus, their own appraiser had appraised the lot just 4 months prior for almost double the amount of our loan so where's the risk anyway?

Fortunately, after many phone calls, along with a few days of anxiety, we were able to proceed with our construction, but I think it was only because we had to throw the loan officer under the bus by explaining that he never, ever mentioned this need for documentation or additional approvals and he knew full well about our construction plans.

We are now about 7 months past that time, our house will be done by mid-August, and I thought that it was all forgotten, but we just received another letter from this VP of Risk Mgmt telling us that she needs copies of our approved plans, a letter describing what has transpired since our demo, a construction timeline for completion and all kinds of other documentation. In addition, she is sending out an appraiser very soon to re-appraise the house (during the construction, not in 6 weeks when it will be all beautiful and done!)

Fortunately, the house will appraise for much more than in its original state because it was such a decrepit, poorly built, 60's house and we've doubled the square footage and are doing a high-quality remodel (all on our own dime at zero risk to the bank...obviously our construction can only benefit the bank since their "collateral" will clearly have enhanced value). When this is all said and done, we'll probably have a property that's worth about $1.7 mil and the bank will only have their $550,000 loan at risk, which is our only debt. We still have lots of cash, top FICO scores, etc, etc. One would think that we're ideal prospects for a mortgage and yet the bank is basically harassing us - plus, the even weirder thing is that they truly have no risk in this deal, only upside since our property value, even if greatly reduced, still pays several times over for their loan, and they'll benefit from the enhanced value of our property. Yet, they're actually making thinly veiled threats about terminating our loan if we don't immediately forward this documentation for their "approval" by July 1st (what are they going to approve? we're almost at the end of our construction - it's so absurd!)

My DH and I both understand the importance of sound risk management, having both spent time in the banking and insurance industries, but the lending world these days is topsy turvy! It's like the pendulum swung waaaaaay too far towards leniency and now, compounded not only by all the bad loans but also because of the huge downturn in real estate, the underwriting pendulum is swinging waaaaay back the other way.

I know I shared a lot of detail (maybe too much!)...I'm a little uncomfortable providing details about our finances, even on an anonymous forum like this, but my intent is to hopefully further illustrate how tough the banks are these days and warn people to be prepared (to the extent that's possible) and go in to your building process with eyes wide open to these issues. Best of luck to all.

I am sorry for your trouble. I am from a rural area and what live_wire_oak says is true--discounted sales are comps. In my rural area, high end houses are always worth less than they cost to build because there aren't many people that can afford to buy a high end house and those that can build their own. When the people who build these high end houses leave, the houses are sold at what you may think is a very discounted prices but which is really the FMV in a rural economy, even when the economy is good. Banks, especially now, have to look at market value in the area, not cost, when making their loans. I can feel your pain because you should have been told this at the beginning, not the end. You need to appeal the appraisal, but you are correct that it will be difficult because appraisers have taken a lot of the blame for the current mortgage crisis and are now being more careful than they used to be. I would also investigate whether you have any type of claim against the original appraiser--your reliance on his appraisal has harmed you.

mtnlaw,

Since you have a rural property, you may want to check with your local Farm Credit branch. They handle all sorts of loans to agriculture and do mortgages for rural properties. You don't have to have any sort of active agriculture operation, you just need to live in the country.

I used Agchoice (Farm Credit in PA where I live) when I ran into an issue with a more traditional bank and the people here in Pennsylvania were super to work with. They have a completely different set of underwriting and appraisal rules. I can't speak to what experience you may have in North Carolina but they are worth a shot.

One nice benefit is that they are a cooperative, so you get can get checks paid back each year based on their profitability. I did a quick google on North Carolina Farm Credit and got the link below.

Good luck.

Thanks for the comments everyone.

klabio - thanks for the suggestion and I will check that out.

live wire oak - I am aware of the reality as to comps and the current climate. What bothers me is that the bank did not make it clear at the outset that there would be a new current market value appraisal at the end of the build. Otherwise, we would have revised our project to anticipate the cash downsides.

And, there are some very specific factual issues as to the appraisal that I did not go into on my post for the sake of brevity. We will, of course, address those with the bank after my appraiser evaluates the matter.

I should have perhaps been a bit more specific with my inquiry. For anyone who is or has been in this situation: I am interested in hearing about your experience with your bank - what your bank did (or did not do) to work with you, etc.

This probably doesn't help, but the bank may have had no choice but to select a new appraiser. There are new stringent rules on prior contact between appraisers and loan officers, mortgage brokers, etc., concerning properties that will require appraisal.

It seems likely that the first appraiser could not appraise the property under the new rules, since he or she probably had prior contact regarding your property with someone at the bank on the prohibited list.

I felt sorry for what happened to you.Here are some tips to choose the best home loan lender:
Choose the Lender After Identifying the House: Browsing for a home loan in Australia comes after identifying the target. Some banks offer loans for ready to move in homes while other banks lend money for a property that is under construction. Therefore, it is best to identify the property first and prioritize the financing options later.

I would suggest that you ask for a second appraisal and a review of the first to confirm whether you got a rotten appraisal. Other than that, all sounds fair regarding policy and lending. Sometimes lending policies change and obviously values go down.

Mtnlaw: Hire a very competent real estate lawyer to review your construction loan documents. If their loan commitment was only contingent upon the home being completed per approved plans, I think you have the right to close on the contracted terms.

"This probably doesn't help, but the bank may have had no choice but to select a new appraiser. There are new stringent rules on prior contact between appraisers and loan officers, mortgage brokers, etc., concerning properties that will require appraisal."

All the 'new rules' are for 'conforming' mortgages.

These loans can be sold into the secondary market and Freddie and Fannie may buy them.

If you can find a lender who will hold the note they have more flexibility often called 'portfolio lenders').

An mortgage broker may be able to find you better options.

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Look at the date of the OP

The original appraisal was good for only so long, as specified in the loan docs. Going past that date triggered the requirement for a new appraisal, especially pertinent in a devastated industry. If nothing else, contact your congressmen to vote FOR financial industry regulation. The drop in values lays at their doorstep, and we need to rein them in to others won't be victims.