Construction Loan Appraisal

[dmccarty]

Don,

Thanks for all the ideas and thoughts.

Basically we have come to the conclusion that the bank and
appraiser are playing with the numbers to favor the bank.

For intance, the appraiser would only talk to us after the bank
said it was ok. Excuse me, its my loan, my money, and my
property and the appraiser can't talk to me about their work?

They said it was the law the prevented this conversation. Its
a goog thing my wife has been handling this because I would
have asked for the State Statue that regulates this
conversation.

This is the second appraiser. The first one wasted months of
our time. My wife has had long conversations with both the
loan officer and the loan processer about all this and they say
this is the way the PMI is calculated. My wife asked the
second appraiser on how the land was valued multiple times
and the short answer is that it was subjective. BS.

When we brought up the tax valuations on the comparables
we where given the appraiser said you can't do it that way.
Yeah Right.

We have another lot up for sale right now for twice the value
the appraiser gave. It just went on the market so we will
see. In the paper, there are three other lots for sale in the
same area, one is 5K more and one is 5K less. I think we
know the valuations. There is a smaller lot that just sold
that went for 2.5 times the appraiser's valuation on a per acre
basis....

We are stuck time wise. I'm not sure we are stuck with the
bank. They have been paying for the appraisals and given that
they are not valid from what I can see I'll fight them over the
issue if they force it.

The quickest thing for us to do is get the house build, pay for
another appraisal at the end of the year and the 20% will be
there and the PMI goes away....

Later,
Dan

 

[OkeeDon]

In this day and age, unless you can pay cash for everything, the most important relationship you can have is with your bank. The commercial loan I described above was with a small, local bank. My son and the loan officer's son played on the same soccer team, we were both in the same civic club, and we both went to the same church.

When they were bought out, I went with another local bank. I made sure I had opportunities to serve on committees and have lunches with a loan officer, and always requested the same officer.

When they were bought out, I went a step further with the next local bank, which was just getting started. We bought stock in the bank before it opened -- not much, 200 shares at $10, and also bought 100 shares for each of our kids. The bank is still small enough to know who their stockholders are, and we get treated like royalty when we go in the bank. They've just opened a second branch and the value of our stock has risen, as a side benefit. Again, not much, but enough that we won't lose any money.

My son took it a step further. His roommate in college married the daughter of the owner of a banking chain in Georgia and is president of one of their banks. Adam just makes a phone call and Scott sends him a check. The bank staff fills out the paperwork and Adam signs it later. Of course, it helps that Adam always pays things early, and Scott knows this.

In defense of the banks, the federal regulations regarding loans are overwhelming, and have gotten worse through Homeland Security. I don't know the details, but they have to investigate and provide documentation that you are not a terrorist when you take out a loan.

There is no defense for the lazy appraisers. The whole point of an appraisal is to be objective. There is no such thing as a subjective value in a professional appraisal. If you are damaged because of an appraisal value, you can sue the appraiser for the damages. They are on the hook for their valuation when they sign the appraisal. They have few defenses if they did a poor job.

 

[BillG_in_TX]

Dan,

You don't have to be a farmer to use a Farm Credit lender. They are flexible, quick, knowledgable and very competitive. We used Texas Land Bank when we bought our property, and they are ready and willing to lend us money to build a house when we're ready. It doesn't even have to be a primary residence.

From their website:

</font><font color="blue" class="small">( Before you go to the bank to get financing for a country home or farm, there's something you should know. Banks don't specialize in rural property loans. But the folks at Country Mortgages do. Our loan officers know rural properties inside out. After all, they live and work there.

And they can make their decision within days, not weeks. And unlike the banks, Country Mortgages has fewer fees and no hidden costs. So you won't get nickel and dimed to death on the way to closing. But like the banks, we can write any kind of loan you need at a rate that's just as competitive. )</font>

 

[BubbaJr]

This post makes me realize how fortunate we were when we got our loans for the land and then the house construction. When we started out I took our financial information to the loan officer, he had an independent appraiser do a very fair appraisal on the land, and told us the loan would be reviewed by the loan committee and we should have an answer in 7-10 days for the land loan. We were approved in 5 days. Then we went through the same loan officer for the construction loan after taking him the plans for our house, and that loan was approved in 10 days. Since we had both of the loans through the bank, when we got the regular mortgage on everything they only charged us a $100 fee and we didn't have to pay any closing costs, points, or any other hidden fees. Fortunately the total loan experience was pretty painless for us, plus we were treated with respect and everything was conducted in a very friendly manner. During the construction phase, the loan officer would come out to the house and take pictures of the construction progress before each draw was issued to make sure everything that was supposed to be done was in fact done. He was always friendly and took the time to answer any questions we had, and even now we get a Christmas card from him every year.

Here's a little tip if you want to shave 7 years off a 30 year mortgage. Make your first full loan payment, then exactly 2 weeks later, make another payment of 50% of the first payment. Then every 2 weeks make another payment of 50% and so on. What this does is to eat into the principle faster, and you will be making 26 payments a year opposed to 24. It adds up to about 7 years of interest saved without too much pain in the wallet.

If I were you I would look for another bank or a Farmers Credit Union. I hope everything works out for you. /forums/images/graemlins/smile.gif

 

[dmccarty]

Don,

On the relationship with the bank idea.....

The bank that we are having issues, is the same bank which
loaned us the money for the land purchase. I stayed with them
to try to furher the relationship. Don't seemed to have worked.
/forums/images/graemlins/blush.gif

Our builder uses a bank where our land is located. Both banks
are big national if not regional banks. But the builder has a
good relationship with the bank. The bank knows him and
vice versa. We made a decision to stay with our bank out
of loyalty and to further our relationship with the bank. Looks
like that was a mistake. /forums/images/graemlins/blush.gif

Our builder has talked with his bank and if we need to we can
jumb to them but then we are hit with the time issues.

Our origional plan was to pay off our remaining land loan.
Depending on how things work out we might NOT do this.
Instead we will pay down the land loan and refinance.

Care to guess which bank is going to be getting our business
if this happens? /forums/images/graemlins/grin.gif I'll try to build a relationship with a
new bank.....

Later,
Dan

 

[lamarbur]

you may not like hearing this, but, you said two separate lots of 5 acres each. Building on one, means value for that one.. If you were to combine both lots into one lot and have it surveyed and deeded as such, then your basic lot untouched has much more value,,

 

[8NTX]

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.

First of all, the appraiser MUST ask for the sales price. You don't have to give it to him, nor does the bank, but we are compelled to ask and document this as part of the appraisal. Federal banking laws require it.

If there are two values in the appraisal, the bank cannot combine the two values and make a single loan since these are probably the values to two separate purchasers assuming two separate sales of the property. Banking regs won't allow it. The appraiser can, of course combine the two values into one, but the value is typically discounted to reflect the lower value per acre like you said.

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.

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.

 

[8NTX]

"For intance, the appraiser would only talk to us after the bank
said it was ok. Excuse me, its my loan, my money, and my
property and the appraiser can't talk to me about their work?

They said it was the law the prevented this conversation. Its
a goog thing my wife has been handling this because I would
have asked for the State Statue that regulates this
conversation."

It's not a state statute. It's federal banking laws. Look under Title IX of FIRREA and in the Uniform Standards of Professional Appraisal Practice (USPAP). The appraiser is completely correct. We cannot discuss the appraisal with anyone other than the client unless we have the client's permission. These federal regulations were brought about by the savings and loan collapse in the '80s. It keeps borrowers from shopping for the highest appraisals, etc. Appraisers are required to take USPAP as continuing education about every other year in most states, and the above rules about communications and confidentiality are discussed every time. We must be hired by the lender for federally insured transactions, and communicate the results of the appraisal only to them. It's the one thing that many borrowers don't understand, and even most bankers don't understand it. But an appraiser can get in serious trouble for this type of violation.

 

[OkeeDon]

If I understand what dmccarty said, then he has accepted the change in the banks position about including both lots in the equity. His problem is that the appraisal for just the one lot came back with a value for the land that is about 50% of the assessed value. That's pretty hard to understand, because assessed value is supposed to be about 90% of the market value, and usually runs about 50% to 90% of market value. Using some numbers, that means that the appraiser said the land is worth $10K, the assessor says it's worth $20K for tax purposes, and that should mean that the market value is $21K to $30K. dmccarty got permission from the bank to speak to the appraiser (the bank is the appraiser's client, even though the homeowner pays for it), and the appraiser told him that land value is "subjective". Translation -- the appraiser thinks it's worth whatever he says it's worth, even without documentation. Also, from what I read, the second piece of property was never covered in the original appraisal -- the two values were for the house and for the land value of one lot.

dmccarty, the appraiser does not necessarily have to show all the comparables in the appraisal report, but he should have something in his work files to support his judgment. If you believe the appraiser has made a mistake that can't be reasonably supported, you can complain to the state licensing bureau. You could prepare a letter to the state but not send it, and show a copy to the bank (who will no doubt share it with the appraiser), and tell them you want the land value re-examined or you will send the letter. The letter should have your reasons, including your research, to support why you think it's a mistake.

8NTX, I don't know if federal banking laws require asking for the contract prices or not, although I'm aware that USPAP requires that in the case of appraising something that doesn't exist yet, such as new construction, that supporting data be acquired, such as the cost of the house. But, even if it is a requirement to ask for a contract price, in the case of an existing improvement, my son feels strongly that the appraiser should not be aware of the amount before doing the appraisal. His example: A sales contract for $220K, a fair market value of $250K. What he sees in his reviews is an appraisal of $220K, which is enough to satisfy the bank, while probably making it easier for the appraiser to support it. The appraiser says it's "good enough". The bank says it's "good enough", because it satisfies their federal requirements. But, it's not a real appraisal, and, if the home buyer requests and receives a copy, it's misleading. If the appraiser didn't know the contract price in advance, he'd have to do a "real" appraisal, and should come up with the $250K. That's what the homeowner is led to believe he is paying for, not just something that's "good enough".

Now, consider a contract price or $220K and a fair market value of $200K. Because the appraiser knows the contract price, and because he wants to keep getting appraisal orders from that bank, he'll stretch the limits and come up with the $220K. That's what the bank wants to hear, so their rear end is covered with the paperwork. But, the bank -- and the homeowner -- could end up getting hurt if the property does go to a forced sale, because the loan value might not be adequately covered. But, that's my son's idealism showing -- we both know the Real World is full of lazy appraisers. It sounds like you're a good one, also, and maybe you don't see the volume of poor reports that my son has to review for the bank.

The bank he works for is a large thrift with 270 locations in 10 states. They are somewhat unique in that they rely more on the appraisal of the property than on the customer history. They generate about 20% of their appraisals in-house and the rest are from fee appraisers. As district appraisal manager for big hunk of Florida, it's part of his job to review all of the outside appraisals. The only thing he dislikes about his job is that so many of them are garbage.

<font color="blue"> 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. </font>

I think what I read was that the appraised value is 50% of the assessed value from the county property appraiser's office, which is even worse. The market value should be even higher. While I'm only hearing one side of the story, it seems obvious that the appraiser in question is not coming up with market value. I think dmccarty suspects there is some collusion between the bank and the appraiser to show a lower value for the land, thus forcing it into PMI, which benefits the bank. I don't know if banks collect a portion of the PMI fees....

 

[BradK]

Dmccarty, I am also a fee appraiser (in training just need a ton more class hours). I see your frustration in alot of reports I work on. But like others have said the land value should be at the market value supported by sales. In an area around me lot prices seem to jump daily and the closed sales do not show it for a period of time thus some stuff is missed. I have seen some appraisals that I would not want my name on due to the questionable way of appraising on them. When I do construction the land is supported by lot/land sales in the area.

Don, your son has some good theries but I do get the contract/build price to see if I am close but I do not really concern twith it to much, as I need to be at market value to protect my livelyhood. I have missed some commercial appraisales by $500,000 and some residentials by ten of thousands. It is a major headache to deal with the banks. On some of the commercial stuff it takes a meeting with bank and client to show our side and why it is what it is.

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.

Dmccarty as 8NTX said if you want PM me.

BradK