Construction Loan Appraisal

KAB · Mar 30, 2004

I don't see it listed how long you have owned the property. I just refinanced my current house and financed a 3 acre lot through the same bank. When the appraisal came back for the lot at approx 20% more than the purchase price I asked if that would make a difference for the loan. No it does not. The loan officer stated that I had to "own" the lot for a full year before any equity (other than money pd) could be counted. After a year then any equity could be counted as owner equity.

When I purchased my current house I went through what you are going through (due to a being relocated by my company, another story.) I would try another bank.. A local bank that understands the local market.

Good luck

Kurt

OkeeDon · Mar 30, 2004

That sounds like just a lot of bushwah from the bank officer to cover the fact that he just didn't want to include the extra value. Value is value; if the property is worth more, their loan is covered better or they can loan more.

Understand a basic thing about collateral (which is what your equity is being used for). The bank doesn't care what it is, they just want it to be something that would hurt you so bad if you were in danger of losing it, that you'll do whatever it takes to avoid losing it. Since you had not owned the property for a full year, the loan officer probably felt that it would be too easy for you to walk away from it if you couldn't pay the loan. So, they didn't want the possibility of being stuck with a higher loan (for which you would have qualified with a higher equity), and thus came up with that policy as a BS way to explain it to you.

dmccarty · Mar 30, 2004

lamarbur,

Lets see how short I can make this long part of the story. /forums/images/graemlins/grin.gif
Seems like everything I do is a long story..... /forums/images/graemlins/grin.gif

The land we bought is 10 lots roughly 5 acres each. Only a few
lots perc so we go the land cheap. More to it than that but that
is the short story. After we bought the land, within a couple
months we sold some timber and refinanced the land loan. At
that time the bank was supposed to remove one of the lots
from the mortgage. We where going to build on this lot. Which
is Lot 13.

Fast forward a few years. We did not build on Lot 13 which is
another long story I'll leave alone. /forums/images/graemlins/grin.gif

Trying to get the construction loan, we needed to get Lot 13
free of the loan as well as Lot 14, 15, 16, and 17. The timber
more than paid for these lots free and clear so the bank did not
have a problem with this but this took up a month or so to get
a lawyer to free these lots from the loan.

As part of all of this, I had asked and had been led to believe
by the bank that we could use two lots as colateral on the loan
without combining them. This seemed/seems reasonable to me
since if they have the Lots tied up in a loan I can't sell them
without the bank giving permission. Which is what we just had
to do to get the lots out of the land loan.

If we combined both lots togather, which would be easy to do,
but consume more time, the larger lots would be worth more
than one lot but not twice as much.

Since the lots are in a subdivision to get a fair valuation the
appraiser would have to find another development with lots
of this size. These are few and far between. And usually the
lots are less valuable which is why the developer made them
into a 10 acre lot instead of two 5 acre lots. Or to put it another
way a 5 acre lot may go for 50,000 dollars. A 10 acre lot is
not going to go for $100,000. The 10 acres might go for $75K.

This is not our main concern though. Our main concern at this
point is just moving forward and trying to get the house done
this year. /forums/images/graemlins/grin.gif If we have to wait to combine the two lots
that is going to consume more time.

One of our many frustrations with the bank, and why I have
gone through this part of the story, is that the loan officer KNEW
what we wanted to do. She should have known this could be
an issue and told us months ago. When the lawyer went and
took the lots out of the loan he could have easily combined
the two lots and we would not have a problem. We had
discussed this over and over and over with the bank. The
loan officer knew our plans and requirements but she dropped
the ball...

Sorry for the long story. I tried to keep it short! /forums/images/graemlins/grin.gif

Later,
Dan

dmccarty · Mar 30, 2004

8NTX,

Thanks for the reply.

I am an appraiser. I understand that you have a house on 5 acres, plus an extra adjoining five acres. The appraiser gave two separate values rather than one value. You also stated that 10 acre lots go for a lot less money.

The appriaser gave us one value for one lot. We had been led
to believe that we could use the two lots as the equity in the
loan. But on the land we only got one value for one lot.

What I do not understand is that the bank does not use the
appraised value of the completed house/land in the computation
for PMI. The are using the contract price on the house which
in our case is the loan amount plus the valuation of the lot.

Its seems to me that the should be using the appraised value
to compute the loan/equity ratio. I don't understand this at
all.

Cut out a bunch of informative stuff....

Banks are the appraiser's client, not the borrower. But of course it is ultimately the borrower that pays the fee. Again, these are federal regs.

Good information. Thank you.

I don't understand your statement that "the appraised value is about 50% off the market value of the land", since appraised value is supposed to reflect market value. Just FYI, I've never talked to a borrower who didn't buy their property "way below market value". Feel free to PM me if you want.

And we did buy way below market value. /forums/images/graemlins/grin.gif We bought the
better part of a subdivision. Cheap. The developer had died
years ago. He had moved out of state. And more importantly
most of the land did not/does not perc so it is unbuildable. But
there are enough perc sites for what we want to do so it was
perfect.

I'll throw out some numbers. We paid not quite 3,000 dollars
an acre. Lots selling the year we bought sold for 12,000 and
acre. This was 4 to 5 years ago. A roughly 2 acre lot in the
subdivision just sold for over 20,000 an acre. The tax value on
the land portion of the properties used in the appraisal worked
out at $17,000 an acre. Our apprased land value is about
$8,500 per acre. Thus the 50% figure.

As an appraiser, is it your opinion we bought way below FMV?
/forums/images/graemlins/grin.gif

Thank you very much for your replies. I knew there had to be
some people in the TBN BrainTrust that could give me some
insight in all of this. One of the things that we have been told
by the bank is that it was "harder" for them to give us the loan
since we owned the land outright. If we still owed money on
the land it woudl be easier. HUH?

We don't understand this and no body at the bank can explain
it to us....

Thanks again.
Dan

dmccarty · Mar 30, 2004

BradK,

First of all I'm going to highjack my own thread for a moment. I
just noticed you are in Plam City. You and Don are neighbors!
My parents live in Palm City. Last December I had thought
about meeting up with Don since I was in FL but other issues
got in the way and we ran out of time. I'm sure I have driven
past Don's property. Hopefully Christmas will be at my new
house this year.

<Thread Hijacking over>

8NTX, I know about that USPAP with talking with the client, I will talk about anything but value with the client. I get an earfull of people and threats that we make up these laws.

At this point we have lost trust in the bank. We have been
told some things that did not work out. We are on our second
appraiser. The first one refused to finsih the appraisal. Dont
know why. From what I could see I don't think they knew
what they where doing. Our builder questioned their abilities
and a couple people at the bank said they have had problems
with them before...... GRRRRRRRR......

I'm going to keep this public for now. I don't mind mentioning
most of these numbers since it is or will be public record at
some point. Hopefully this conversation will help someone
else.

Later,
Dan

dmccarty · Mar 30, 2004

millsnhills,

I missed your reply and just noticed it.

You are close by. We are building in Pittsboro.

Our builder uses CCB so if we jump ship it will be in that
direction. /forums/images/graemlins/grin.gif

Later,
Dan

dmccarty · Mar 30, 2004

KAB,

We have owned the land for four years.

Later,
Dan

dmccarty · Mar 30, 2004

Don,

Your post is longer than mine! /forums/images/graemlins/grin.gif

Thank you for spend the time. I appreciate it.

I think you understand our "issues." /forums/images/graemlins/grin.gif

I started this thread since I knew that the TBN Brain Trust
would pop up with some good info, which is what I have gotten.

We are almost certainly going to go forward with the loan. It
has taken us four years to get this far and we need this house
to get built. We can work our way around the PMI issues. We
just think it is Bovine Scat. It took us 4-5 years to buy our
land and we think we know how to value land. We sure did
look at lots of parcels. And we know our area real well. I'll
be interested in 8NTX's opinion on the number I provided in a
previous post.

Later,
Dan

RamTruckMan · Mar 30, 2004

I am a real estate appraiser and the situation you descibed is typical. For some reason lenders will not loan on a home sites more than five acres. I have appraised 200 acres or larger and the lender requires a hypothetical five acres and the house. I appraised a property back in December which had nearly 300 acres and the lender required the lady to survey her house and two acres out and make a new legal description to get the loan. I have asked a 100 times why they won't lend on land and I have never gotten an answer. I have seen many, many houses destroyed by the homeowner. The land takes some serious effort to destroy. I would think the land would be more secure collateral. My best guess is that nearly all loans are sold on the secondary market. If a loan does't fit the secondary market criteria the loan can't be sold and mortgage broker, live by commission generate by putting loans together. You best bet is a home town bank if you can still find one. They have a lot of latitute and don't have to meet the secondary market criteria. Sometime they offer a pretty good rate, but they generally a little higher than secondary market mortgages offered by the mortgage brokers.

New construction is not the problem. The will only finance 5 acres on existing dwellings.

I understand you stituation, I have seen it all too ofter. Wish I had an answer for you, but that is the way the system works. It needs to change or provide a good reason why land isn't good collateral.

OkeeDon · Mar 31, 2004

Dan, be sure to keep us up to date on how this saga continues. I've been talking to Adam (my son), and he's interested to see how it turns out.

Yes, BradK and I are neighbors. He took time to stop by my shop a couple or weeks ago when he had an appraisal in the neighborhood. Nice guy, even if he does own an Orange tractor. /forums/images/graemlins/grin.gif When I had my grill business, I built a number of outdoor kitchens in Palm City. Are your folks in one of the gated communities?

dmccarty · Mar 31, 2004

Don,

Well, I was thinking of meeting Brad and you but if Brad has
an Oranage tractor I'll have to rethink things. /forums/images/graemlins/grin.gif /forums/images/graemlins/grin.gif /forums/images/graemlins/grin.gif

The parents are in a gated community. The best thing about it
is that the subdivision has a 4 mile private road. When I'm
down there I can go run and feel a bit safer from cars. /forums/images/graemlins/grin.gif

The funny thing is that even though they live in a gated
commnity with security, they still have problems with noisy
neighbors! /forums/images/graemlins/confused.gif Hopefully the will move up here and
build on one of our lots. I have a gated community as well.
I put in four posts across the road, put up some boards,
installed two 10 foot pipe gates and posted some no tresspass
signs. /forums/images/graemlins/grin.gif The tick and chiggers are my security. /forums/images/graemlins/grin.gif
/forums/images/graemlins/grin.gif /forums/images/graemlins/grin.gif

Later,
Dan

lamarbur · Mar 31, 2004

you've just added a lot more to the explanation.. Only thing I can offer is for you to listen to the licensed appraisers that have answered here and I believe one person said his son does this thing for a bank system.. You'll probably have to outline, in detail, start to anticipated finish (home built) and let some of the people in the know, help guide you to where you want to be.

OkeeDon · Mar 31, 2004

Well, I was thinking of meeting Brad and you but if Brad has an Oranage tractor I'll have to rethink things. 

Well, it might be an interesting meeting, since I see you have green and I have blue. All we have to do is agree to disagree on color, then start off on that positive note.

Running in a gated community, watch out for old geezers in golf carts. You might be safer on Martin Downs Blvd.! I've calculated that each lap around the fence line on the combined 7.5 acres that includes my daughter's property is 1/2 mile. I calculated that for my wife, because I try not to walk anywhere, let alone run. God gave us legs, then realized His mistake and gave us wheels.

I can't imagine them moving back North. I have a cabin in NW NC, and I've been there in the Winter. I can take it because I know I'm heading back to Florida in a couple of days...

8NTX · Mar 31, 2004

(

QUOTE: 
...
And we did buy way below market value. /forums/images/graemlins/grin.gif We bought the
better part of a subdivision. Cheap. The developer had died
years ago. He had moved out of state. And more importantly
most of the land did not/does not perc so it is unbuildable. But
there are enough perc sites for what we want to do so it was
perfect.

I'll throw out some numbers. We paid not quite 3,000 dollars
an acre. Lots selling the year we bought sold for 12,000 and
acre. This was 4 to 5 years ago. A roughly 2 acre lot in the
subdivision just sold for over 20,000 an acre. The tax value on
the land portion of the properties used in the appraisal worked
out at $17,000 an acre. Our apprased land value is about
$8,500 per acre. Thus the 50% figure.

As an appraiser, is it your opinion we bought way below FMV?
/forums/images/graemlins/grin.gif

Perhaps you did, but like a "typical appraiser", I'll say that your perception of value may be "subjective". /forums/images/graemlins/grin.gif
The problem comes in when you say you are basing your 50% number based on the assessed value of the comps. The assessed value may be way off. I am also a property tax consultant. In most states, assessed value is supposed to reflect market value. But I have seen HUGE differences, and have successfully argued this hundreds of times with taxing authorities. Using mass appraisal techniques, it is literally impossible to be very accurate much of the time. It is up to the property owner to dispute a high assessed value if he feels it is incorrect. Believe it or not, sometimes an owner will leave an unreasonably high assessed value alone and just pay the higher tax. Too much hassle, too much money on his hands, or maybe he likes to use the high figure in his financial statement.

It's impossible to make comparisons on the comp. sales without information. Did the comps "perc"? Did they sell with favorable owner financing? Was it a true arms-length sale?. Many factors to consider. You may be right in that you bought way below FMV. But I would completely disregard basing your value on assessed values.

I've been an appraiser for 21 years. Land is often the most difficult type of property to appraise, especially when good comps are "few and far between". And I've seen it all - have served as an outside reviewer for banks and federal institutions such as the FDIC and now defunct RTC and FSLIC. I also serve as reviewer and consultant for a local appraisal district when they get sued over value disputes. I've seen plenty of garbage appraisals. But don't give up, there are plenty of good appraisers out there too. A seasoned banker will know who they are. Good luck.

)

BradK · Mar 31, 2004

It is not the orange that bothers people it is my truck that is nicknamed the "Bario Death Machine" by a guy i work with (see pic). Can't miss it. Let me know when you are in town as the firm I work for is moving our office to Palm City out of Stuart.

BradK

dmccarty · Mar 31, 2004

Don,

We can aggree that tractors that are Orange, Blue and Green
are all GREAT tractors and toast TBN! /forums/images/graemlins/grin.gif /forums/images/graemlins/grin.gif /forums/images/graemlins/grin.gif

The golf carts are kinda bad but not as bad as Martin Downs!

My old man is going to have a tough time if they move up here.
He has lived in Florida for most of his life and loves it. But both
of them want to be closer to the grandkids. I told them I'll chop
the wood for the wood stove to keep them warm in the winter.
/forums/images/graemlins/grin.gif

Later,
Dan

dmccarty · Mar 31, 2004

8NTX,

It's impossible to make comparisons on the comp. sales without information. Did the comps "perc"? Did they sell with favorable owner financing? Was it a true arms-length sale?. Many factors to consider. You may be right in that you bought way below FMV. But I would completely disregard basing your value on assessed values.

The comps I am using as well as what the appraiser used all
perc. The appraisers used lots with houses. I happen to know
the subdivision that two of the comps are located. And it just
happened that my EX in laws house was used as a comp. What
are the odds? /forums/images/graemlins/confused.gif /forums/images/graemlins/grin.gif The tax value on the land
is about right. The land was going for $7,0000 per acre in
1991/1992. So its current appraised value is in the ball park.

What you said about percing is one of our concerns with the
appraised value of our lot. I know how hard it is to compare
land. One of our fears is that the appraiser appraised our lot
compared to certain lots in our subdivision. There are a whole
bunch of issues with them price wise. Another long story, but
those lots sold cheap due to lack of known perc and the owner
was literally days from being foreclosed. We sold the land to
the owner at our cost when we bought into the place so the
price was way low. That would not be a good comparable. For
instance once of these lots sold for 2,500 per acre while the lot
next to it is the one that just sold for over 20,000 per acre.
One of our frustrations is that our lot appraised for such a low
number. We did not expect it to appraise for 17,000 per acre
we figured a low value would be 12,000. Heck, I sold land in
a subdivision 5 years ago for around 12,000 per acre.

We will find out the FMV real soon. We have one of our lots
on the market.

One thing that nobody has touched on is on our concern with
which number to use to calculate the ratio between the loan
amount and equity in the property. This is another issue with
the bank since the numbers they use lower our equity in the
property.

Later,
Dan

StoneHeartFarm · Mar 31, 2004

Dan,

Here's a link to the rules governing Appraisers. I think the client part you are interested in is here: http://www.appraisalfoundation.org/html/USPAP2004/statement9.htm

The term "Client" is defined in the DEFINITIONS section of USPAP as

Also, the GLB Financial Privacy Act of 1999 applies.

These rules were put into effect to keep appraisers from being unduly influenced, (through intimidation, bribery, etc.) by owners/buyers/realtors and so on. It has, unfortunately, often resulted in hurt feelings on the average homeowner's part, and the average appraiser is still being pressured.

( One thing that nobody has touched on is on our concern with
which number to use to calculate the ratio between the loan
amount and equity in the property. This is another issue with
the bank since the numbers they use lower our equity in the
property.
)

Which one is the bank using? Most probably the one developed from the Comparable sales. That is usually considered a more accurate indicator than either construction cost or income value. The one you should use is the one the bank chooses. It depends on who the investor is that they are trying to sell your loan to. Different investors have different requirements, and those are outside the power of the bank to control.

Steve

dmccarty · Mar 31, 2004

Steve,

Thanks for the link. It gives me more warm fuzzies about the
appraiser. Its not all negative with her. She is heads and
shoulders above the company that did not finish the first
appraisal. She has been very repsonsive and open to
questions. The link does make me a bit happier.

Which one is the bank using? Most probably the one developed from the Comparable sales. That is usually considered a more accurate indicator than either construction cost or income value. The one you should use is the one the bank chooses. It depends on who the investor is that they are trying to sell your loan to. Different investors have different requirements, and those are outside the power of the bank to control.

The bank is NOT using the comparable value in the appraisal to
calculate the ratio to determine PMI. They are using the
appraised value of the land which is their low number. Then
they are using the loan amount/contract price on the house to
sum up the total value of the property. This sum is less than
the appriased value from the appraisal. Using these numbers
we end up with less than 20% into the project.

There is a bunch more I could say about this but I'll stop beating
the horse.

We are moving forward on the loan. The paper work was sent
to the underwriter today so we will see what happens next. If
there are no more suprises we should close next week and
break ground soon after.

The bank says if we do another appraisal after the house is
finsihed, they use the comparable number. The HIGH number
which would give us 20%. Also at that point we will have sold
one lot at market prices. AND added to the house outside of
the loan. So we would have our 20%.

Sure seems like a big game that the bank has stacked in
thier favor....

Later,
Dan

StoneHeartFarm · Apr 1, 2004

Dan,

Going ahead is probably your best bet. Once the house is completed, the bank will view it differently and will use the value derived from comparable sales. Different investors, different rules.

Personally, I think all of the land should be included in value, since you can bet the mortgage will include all of it. But, that is unfortunately not the way it usually works, unless you stay with a portfolio loan through the bank.

No problem with the link. The general public has as much right to read those rules as appraisers do. They affect you too, and were written with the help of your tax dollars. Please note that these are the current 2004 rules, they are rewritten every year. (Remember those tax dollars?) /forums/images/graemlins/wink.gif

Steve