Not the end of the world, as long as you have cash to make up the difference.

Cash solves your problem. Otherwise, talk with your banker. If you need to borrow, it will depend on your residuals, credit history, and bank policy. May be necessary to shop for financing. You'll have more options if your not jumbo.

There are generally two types of appraisals: a cost to construct appraisal and a market comparables appraisal.

The cost to construct appraisal is an estimate of the cost to construct a new home. The market comparables appraisal is based on what "similar" homes sold for within the last 6 months. The data set for "similar" homes must include "fire sale" or "distressed" sales. The problem is that the market comparable appraisal dumbs down the cost of a new home to conditioned square feet and no. of bedrooms and baths. It would be rare for a "market comparables" appraisal to be equal to the cost to construct a home. 96% is close enough for celebration!

Not sure which type of appraisal was done, just got the figure from the bank late this afternoon. I guess it's a hard pill to swallow, building a house when you know you are paying more for something than it's technically valued at.

Talk to the builder with what your bank told you. GC's usually make 28-32% profit. They 'should' be able to work with you if they are professional. Is there anything in the contract predicting future appraisal when house is built?.

Come up with more cash. Period. Your builder is only going to ask you which features that you don't want done. Which then affects the appraisal negatively again. It ain't coming out of his pocket.

And you should already have a healthy contingency budget to cover upgrades and woops and didn't see that coming issues. If you don't, your build is already in trouble before you begin.

So what happens when the appraisal comes back 6% low?

No problem. You make up the 6% or nothing moves forward.

Any estimate or any appraisal is subject to error. I believe the tolerance for an appraisal would be +/- 5% at best. The bank may or may not require you to make up the difference for a 6% lower appraisal.

The good news is that, if we assume no error in their appraisal, that you're paying a 6% premium for custom, new construction versus resales--not an unreasonable premium.

Best wishes for a successful project.

Only 6%, that's not great, but better than us! We were 9%!
We had cash to make up the difference in the down payment vs what we what were approved for.

Ours was 20% low. Feel better now? ;-)

mw......you must be talking to GC's.......they lie thru their teeth!!!!!!!!!!!!!!!!!!!!!!!! I know that for a fact!!!!! They 'don't' want people to know 'really' what they make so they can make as much as possible!

If you invest 100's of thousands of bucks to 'only' make 6-8% return in a business.....you have 'no' clue how to make money. It's NOT an IRA or 401K. I have 3 degrees all in business. I was in retail(scuba diving and snow ski) all thru HS and college, ALL of the items we sold for at least TWICE as much as the company paid.....that's normal.

I have no problem what GC's make........that's business. The norm.

You have no idea what you are talking about. Retail has zero correlation to the construction world. Zero. Even in a luxury renovation market, a contractor will be lucky beyond belief with big brass ones to get 15.% of the project by the time overhead is paid. Markup isn't margin. Gross isn't net. Most contractors average under 10% for a 60 hour a week high stress job.

Ah, time to interject some facts...

One of the best managed production builders in the country is NVR. Business majors out there will no doubt want to have a look at NVR's most recent annual report (available on line.) For fiscal year 2016 they reported gross revenues of $5.7 billion from homebuilding operations (they don't own land.) They also grossed a cool $113 million in mortgage banking fees. Gross margin from homebuilding was 17.5% and their net income (including net mortgage income) was $425 million or roughly 7.5% of total gross income.

As Sophie succinctly stated, small volume custom builders--including my company--work on lower margins than that and we don't have mortgage banking operations to help improve the bottom line.

Thanks for all the replies so far. My contractor/builder and I have already been thru a round of cuts to drop the price to where it is now. He's been up front and stated that's he's only making 15% on this project, and he is letting me buy the appliances, fixtures, lighting etc. at his cost without any additional markup. That's a huge savings on the kitchen appliances! So I really don't feel like I can ask for any more additional help from him... I'm hoping the sellers of the lot might re-negotiate the price of the lot abit, but I have not heard anything back from them yet.

At least you're finding out before construction has started! This is why I'm a fan of one time close loans. Typically only one appraisal up front so no appraisal surprises in the end once the house is built.

"He's been up front and stated that's he's only making 15% on this project"

He's marking up the material up 15%, not MAKING 15%...........

Charles - I was going to post something similar. Toll Brothers, which is the most high end of the mass builders, has slightly higher numbers in general - about 20% gross and 10% net. And remember, those guys are taking on all kinds of risk that a GC working on contract for a homeowner doesn't.

We once bid against builders for a derelict property. I was shocked at how high they bid - they have shockingly low (to me) profit margins even for spec properties. The 10s of thousands I paid our GC was both one of the largest expenditures we've ever made and the best one.

Sophie.......you have NO idea what you're talking about!!! Dozens and dozens of GC's told me the same thing for many many years....maybe 6-8% gross profit.......COMPLETE LIES I found out 10 yrs ago. They ALL say the exact same thing to try to make people 'think' they make VERY little profit. It's a mind thing for them. COMPLETE BS!!!!!!!! They have you hooked like they did me for many years. It's scigocological.l They have you taken in like they did me for many years. That's what they want!!

I know a GC that got into it in 2002, as I said before in less than THREE years he was a MULTI millionaire!~!!!!! Of course he got into it during the housing boom. You DON'T make that kind of money with ONLY a 6-8% gross profit!!!!! He is a one person business. He just retired last year in his mid 40's. I see GC's all the time driving either Cadillac's and 40k PU's.

You have NO idea!!!!

GC's do NOT want people to know what they REALLY make!!!!!!!!!!!!

Robin.. Most here have built homes. You've got experts here giving facts. Your use of capitalized words doesn't change that. I actually take offense to your general statement claiming all GC's lie through their teeth, because mine was a saint. Further, I paid our GC directly. I know exactly what he made because I signed off on every single check and the correlating invoice for our build (no markups). Our contract also stated what he made, which was a fixed fee, not a percentage based fee. Every single builder we interviewed were upfront about their cost/fee. The highest was 12% plus cost - no markups, per contract.

OP - like others have said, if your appraisal is low, you will need to come up with the cash. Ours was around $37k lower than what we needed to close our construction loan and obtain our Mortgage. Let this be a lesson in how much contingency funds you'll need.... If things are so tight now that 7% is an issue - don't build!

Thanks for all the replies everyone, it was interesting... We were able to get approved for 15% down instead of 20%, so everything is going to work out. In the end its going to add an extra 1/8 point to our rate, but I know we will refinance within a few years, so its not that big of a deal.

In the end its going to add an extra 1/8 point to our rate, but I know we will refinance within a few years, so its not that big of a deal.

Be careful because rates are tending to rise.

Why do you think you will refinance?

We have a few things of value that we are going to sell in the near future, and it makes sense for us to invest the proceeds of the sale into our house.

Mike, hopefully you're not paying PMI due to putting less than 20% down. It's a total rip off so I'd suggest putting down more $ IF it avoids PMI. And refinancing cost money so whatever loan you're getting now should be the one you want to keep long term (unless something crazy happens or your finances change drastically). People who refi every few years (and keep getting a 30 year note) never get out of debt. I don't know what your end goal is.. But mine isn't to be in debt my whole life.

Mike, you can do that by simply applying those funds to your loan principal. It won't change your payment amount, but will certainly change the number of payments you make and the amount of interest you pay.

Can you sell the items sooner, so you can include the proceeds in your down payment?

I'm wondering about that 28-32% figure a lot. Because no builder that I've met in my 30 years in design has ever even charged that amount of markup, much less netted that mount after expenses. They'd be out of business even attempting that! Their competition would eat them alive. You got hungry new guys around here now charging under 10% markup. Which isn't enough to cover their expenses on the job, Only they aren't good enough business men to know that yet.

Most cost plus projects that I've been involved with used around a 15-20% markup. It's as transparent as you can get for builder costs. In fact, the majority of custom projects that I've known have used that contract method.

I understand that you've not had a good experience. But, I think it really clouded your judgement.

No, no PMI :-) I was thinking for sure it would be added going from 20% to 15%, I specifically asked about it, and was glad to find out that it would not be added. Can't sell the items any sooner. Takes some time to move, plus I need somewhere to live while my house is being built.

ht.....I'm not saying there aren't GREAT GC's out there....there are 'many'......I'm just saying they lie thru their teeth on what they 'actually' make. If you own a company, are you going to advertise what profit you 'actually' make (for each product) or lie about it???????? That's business as usual man.......the 'real' world.......I think in over 99% of the time, people don't actually 'ask' the GC what profit makes but the GC's throw that % out.....over the last 40 yrs, over every article I've read and talked to people, it doesn't seem to be regional but thru out the country. It must be an oath they take it seems. VERY unprofessional!!!!!!! I've talked to 'over' a hundred GC's over this time and almost 'everyone' thru this % without asking. Again....I have no problem with what they make.......they just need to STOP lieing about it!! They need to just 'shutup".....Probably 99.9% of people have 'no' idea what it actually costs to build a house and they know this and take advantage of it.

Robin - every market is different. You would make a better argument without over capitalizing and repeating punctuation.

There are certainly situations where GC's do very well but in the one off custom market, most are not making 30% profit on the sale of a house. This would not at all be the same as an investment ROI. I've done several builds and had full transparency and 30% would not be marketable in my area.

A cost plus build is completely transparent as to all pricing.

So, are you saying that builders routinely commit some type of fraud that increases the compensation outside the contract? How are you suggesting that 30% anecdotal figure even occurs, when it is public record for publicly held companies to report earnings and expenses? Privately held companies also closely follow those published figures, or they would price themselves out of business. It is basic supply and demand economics.

I'm sorry, but facts, figures, and industry reporting, will not be on the side of your statements. And if you are suggesting that 90% of builders routinely commit fraud, then that wild assertion further negatively damages your credibility in a conversation. It truly needs much more real supporting evidence in order to paint an entire industry with such a broad brush.

I'm sure that the many publicly identified professionals own anecdotal experiences over many years on this thread will not sway your opinion, but you are the one making the outlier assertions. It is up to you to provide some actual documentation for those anonymous internet opinions if this is to be a rational discussion.

I hope you enjoy your home, and that you never need to build again. :)

Um... look at your contract. Your GC's numbers should be right in there. For mine he added 10% and has told us that he will probably drop that down to 8% when it's all done because he has sub-contractors that he doesn't have to babysit every step of the way, also he is doing all the carpentry work, framing etc so he will be getting paid for that. Plus when he figured the 10% he didn't add it to his own work so we are not paying 10% on top of his carpentry bid. You also have to realize that out of that 10% he is paying for insurance, porta potties, dumpsters etc.

If you invest 100's of thousands of bucks to 'only' make 6-8% return in a business.....you have 'no' clue how to make money. It's NOT an IRA or 401K. I have 3 degrees all in business

I also have several business degrees, including a PhD, and spent a lot of time in a real business making real profit before becoming a professor. My advice to you is to seek a tuition refund.

The entire S&P 500 only makes an average of 8.6% profit. The average for retail is only 4.4%. The average profit margin in the construction industry for publicly traded companies is only 7.1%. Furthermore, and even more importantly, it doesn't matter how profitable G.C.'s are. If G.C.s can make so much money what incentive would a G.C. have to make less on your job?

You claim to have three business degrees but don't seem to understand the basics of supply and demand. Just because someone is in a profitable industry doesn't mean you get to pay less. Run right into the Mercedes dealer and let them know that what they charge is highway robbery and give them a check for what you think they should charge, then get in the car and just drive off. Let me know how that goes for you. How much the G.C. makes isn't relevant to your decision. All that matters is what you could get it for somewhere else.

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To the OP and anyone else in this situation. Don't ask a G.C. who you trust to reduce his profit, not because he will not, but because he just might do it. Here is a helpful hint for being a client, be the client that you would want to have. I strongly believe that the best houses are built when the G.C. and the homeowner look out for each other rather than everyone trying to get as much as they can. Don't start the game of trying to get one over on your G.C. to save a little bit of money, because the G.C. is better at that game and once started the homeowner almost always loses.