Low Appraisals

Appraisal Too Low

Carl,

My husband and his father have been building homes for years. Now we are ready to build our own home, saving the money my father in law would charge someone else and doing much of the labor ourselves.

We purchased 17 acres of farm land last May for a total of $59,000. We have acquired $9,338 in equity.

We have designed the home and had blueprints made for a 1700 square foot ranch house.

The bank's appraiser valued the house and land at $234,000.

We objected to the appraised value, but the appraiser said it was their opinion and they were sticking to it.

Our credit scores are both above 750. The bank will only loan up to 95% of the value (which is absurdly low) and that is if we pay PMI (which is a waste of money).

What would you advise us to do?

We enjoy your website very much and found it very helpful so far.

Sincerely, Kristen

Hi Kristen,

That's too bad about the appraisal, but devaluation of home values has occurred around the country.

BUT, you are about to receive the true benefit of being an owner/builder (being your own General Contractor).

If you are careful with your shopping for the best prices for building materials (prices have fallen) and the subcontractor labor for the jobs you are not going to do yourselves, you should be able to build a good quality 1700 sq. ft. ranch on a full basement, with an attached garage for under $80.00 per sq.ft. (Less if on a crawl space or slab), especially since you are doing some (much) of the labor!

Number crunch:
Appraised value = $234,000
Loan @ 80% of value = $187,200

Land payoff = $49,662 (assuming that your acquired equity ($9,338) = payment on land)
Cost to build = $136,000 (1,700 X $80)

Total = $185,662!

Voila, you don’t have a problem! And, NO PMI at 80% LTV (Loan to Value)!

If worse comes to worse, borrow more (95% = $222,300!) and pay PMI (It's not forever).

In a short period of time (hopefully) and after you finish your new home, your house’s value may be up where you think it should be and you’ll be thankful that the lower appraisal made you shop more carefully and really stick to your budget.

You’ll really be the winner!

If you don't agree with these numbers, please let me know and we can revisit the situation.

Best of luck,

Carl

Carl,"Yes, that helped very much!!!

Thank you for the encouragement!