I will inquire regarding the contribution of land to the LTV. That is an excellent point not previously considered. Would you expound further on this subject using the dollar values I mentioned?

The last thing I want to do is get stuck in a precarious situation with the estate owner financing the land and expecting to be paid in full 30-60 days later, only to find that the bank values the land and home considerably less than anticipated, which puts me in a situation where more cash is needed.

If the land which sold for almost $6k/acre is truly comparable to the land you are purchasing for $4k/acre, is there some obvious reason why you are getting it for cheap? Otherwise I'd assume either your land is worth less than theirs, or that for some reason they overpaid.

The other thing is that, as most everyone on this board can tell you, assuming that the marketable value of your new build is equal to the cost of the new build is very hopeful. Perhaps for a cookie cutter suburban development that is the case, but for a rural custom house that is rarely the case.

The $6k/a land was a listed property, all timber. The $4k/a land is unlisted and being sold by the deceased owner's estate. 19 acres are timber and the remaining is cleared land being farmed for hay. Both have significant road frontage with no easements. A house is currently being built on the $6k/a land by a semi-custom builder. My house would be built by a custom builder.

I have sales history from the last three years in this county that shows undeveloped land selling for an average of $10k/a.

The house would be four bedrooms, three baths, two-story, all at 2300sf. Comparable homes in this county are listed for an average of $270,000.

Are both the lot your considering, and the potential comp lot already set with a plat, well, and septic field? That adds a lot of value to an undeveloped lot. Or is the 25 acres you're considering buying not even officially subdivided yet? Big range of possibility here.

My gut reaction was that you're in fantasy land in terms of the actual cost to build the home. If he tells you $275k, it's probably a minimum of $325k. This must be a tiny, builder grade house. Which seems weird to put on 25 acres.

Both lots already have a perc permit on file. Both connect to county water, but both will require a septic field. My cost from the builder includes the septic field.

I'm very confident in the cost to build the home. I have bid the house through two separate builders and both are in-line. Where I will achieve the greatest value is upgrading interior amenities using my resources; I am in the custom residential construction business (specialty trade) myself, so I can install valuable upgrades at cost or less-than-cost for labor.

it is my experience that upgrades usually don't drive appraisals. square footage and comps drive appraisals. VERY specific upgrades (like a SUBZERO fridge count, but not a Miele... which is insane - but the appraisal folks are very slow to change and exceedingly risk averse)

The likelihood of you getting all that in your appraisal is low. But- it's not impossible to have your house appraise for more than you pay for it - esp in an escalating environment. It used to happen more in the boom times, however, and I think appraisers get twitchy appraising anything too high.

Beware the cost plus - however, being in the business you should have better insight than most and have more contacts.

bry911's list of things that go as planned MAY be a little long.

Ok, given what you do for a living, I guess I have to assume you know your local pricing.

If you're confident in the pricing, I'll tell you what's most likely going to happen. The bank wants to do business with you, because they've offered 95% LTV. The bank has tremendous influence over how the appraisal process goes, as there is a period of review before anything is released to you. They're going to value your land as being worth exactly what you paid for it, and they're going to value the as-completed appraisal right around what you paid for the land plus what you're spending on your construction. You will still need to come up with the 5% plus closing, and I would encourage you to have another 5-10% minimum for unexpected overages.

We GC'd our own build last year. We bought the land first, then got a construction loan from the same local bank. We did a lot of the work ourselves and came in under budget. After we finished, we converted to a conventional loan and paid off the remaining balances on the land and construction loan. Our final appraisal came in at more than 25% over the cost to build. However, we still had to have the 20% of the loan amount as a down payment. We were told that most lenders would not consider the increased equity for at least a year after the build. They would consider the cost to build as the starting point for the value for that initial loan. So you might ask how they figure this before you count on the equity.

Andy, the bank will finance either based on acquisition cost if I don't own the land or on appraised value if I have the land in my name for a minimum of one day.

Do you feel that they would still finance off of acquisition cost, even if I have it in writing from the lender that the bank will finance off of appraised value, and even if I have a deed in trust in my name?

I'm grateful to each and every person who has read and responded thus far.

Who is the trustee for the deed?

Even if I have it in writing from the lender that the bank will finance off of appraised value - having it in writing doesn't mean anything really. They are not contractually bound to adhere to anything they tell you, until you have some kind of contract. Although I guess you could argue promissory estoppel but good luck with that.

That is a good question. I have not crossed that bridge yet or thought to inquire.

bry911, to one of your initial points, the bank has responded with the following: "house has to be 35% of the loan amount and if you own the land at time of the application we use the appraisal." How does that affect what I'm trying to accomplish here?

Let me ask this - what exactly are you looking for here? If the bank tells you that they will do all those things then I guess they will. There are no standards for construction loans, and they vary widely from location to location. There are a few very common characteristics but even different banks in the same city may have vastly different policies. We can give you some common answers but really specifics are going to have to come from your bank. They are not going to deceive you but they may be a little optimistic.

You still haven't responded to my initial concern. There is a HUGE difference between building a house for less money and having less money to build a house. Are you doing this because it is all you can afford, or are you doing this because you can afford a lot more but don't want to spend it?

As I am fond of saying when this scenario comes up - 1 plus 1 does not equal 2.

bry911, I came here to run this scenario by individuals, such as yourself, who are more versed in this type of transaction and ascertain the merits of it. I wanted to find out if there was a detail missing that would potentially sink me. Provided everything goes as planned with the estate, the only unknown value would be the appraisal from the bank. I have ordered my own appraisal for the land and house subject-to-completion, with the goal to have a realistic idea of what this project will appraise at.

I am doing this deal because the land is being offered well below market value as the owner has deceased and the land is not on the market. I'm leveraging this opportunity to build a home for my family and our future. I do have the money to take a more traditional approach but not see that as the best course of action with the leverage available to me.

I did not see a response from you regarding the contribution of land to the LTV. Would you expound further on this subject using the dollar values I mentioned?

Have you already applied and been approved for the new construction loan?

60 days to close a new construction loan may be pushing it... yeah, they say "45 days, blah blah blah...".

Call your banker and ask why they need the land in your name to do this?

Can you just give the owner a deposit and a contract to purchase?

We had a similar issue, we got a great deal on land so we bought it quickly. It took almost a year to get house plans/builders lined up and the land continued to increase in value so that when we applied for the construction loan, the land value was higher than our cost to build and we were turned away by many banks before even applying because of the ratio. However, we were told by more than one local credit union that if we had not been applying for a jumbo loan then this would not have been an issue at all. It was a real bummer considering we had 20% down even without considering any equity from the land value.

If the land appraised value is 125 and the house build is 275 ( 125/275 = 45% land value to house build cost. I am sure someone will correct me if this is wrong.

We found that some banks used the appraised value while others used the amount paid if it was purchase date was < 1 year. Call around to multiple banks/credit unions and talk to them before you sign a contract for 60 days

It is a really crazy process and we had 10 different banks give us 10 different answers.

I cannot apply for the loan until the land is deeded in my name. This is my bank's requirement to finance on appraised value as opposed to acquisition cost.

I have plans and a builder and am days away from signing a contract. I do plan to add contingency verbiage to the contract that if the sale of the land by the estate falls through or the appraised value comes in too low, the contract is void.