Construction Loan Appraisal

[dmccarty]

We have been trying to close on the construction loan to build
our house since January. Lots of problems with the bank. /forums/images/graemlins/blush.gif

For the entire time we have been dealing with the bank on this
loan the plan was to use the land as the down payment to get
our 20% into the loan to avoid PMI. We have two lots, each
roughly 5 acres, that the bank said was ok to tie into the loan.
Short version of the story, is that after having these discussions
for literally years we are only able to use the lot where the
house will be built.

One problem is that the appraised value is about 50% off the
market value of the land so we don't have 20% into the loan so
we are being hit with PMI and all of that related trash. Here is
how the bank is using the appraisal to compute the percentages.
Does anyone know if this is a standard way to calculate the
percentage.

On the appraisal there is big number, lets call it 110,000. This
is the comparable value of the completed HOUSE and LAND
compared with other properties.

There are two other numbers on the appraisal. One the
contract amount to build the house and the value of the land.
The value of the land is NOT a documented comparable. There
is not a list of other raw land compared with ours like was done
with the finished house. So one number is the so called
appraised value of the land, lets say it $10,000 and the other
number is the contact price on the house which is the loan
amount of $85,000.

The bank calculates the ratio for PMI purposes by adding up
the value of the land and the loan amount and divides total
into the value of the land, aka equity.

What I don't understand is why the would not use the total
value of the property, $110,000, since that is supposed to be
the FMV per the appraisal. Obviously the way they are running
the numbers forces us into PMI.

Is this a standard way to do this for construction loan?

If we continue forward with this bank, we will just get a new
appraisal after the house is done, at which point PMI would be
calculated on the $110,000 figure and PMI would be gone.

Later,
Dan McCarty

 

[riptides]

I don't know Dan, but when the tax man comes around here
they look at the house and land separately.

All my assessments show it that way too......

-Mike Z.

 

[BillG_in_TX]

Dan,

Have you contacted your local Farm Credit agency? Here is a link to Carolina Farm Credit and East Carolina Farm Credit, one of which should include your area.

They make rural home loans, including construction loans, and generally offer better rates than banks.

 

[dmccarty]

RipTides,

As soon as I got the list of comparables, I looked them up at the
Tax office. The tax appraiser has valued the land at twice the
value compared to the bank appraiser. We also know abit
about land values and we and the tax man aggree. But the
bank does not aggree....

Thanks for the input.

Later,
Dan

 

[dmccarty]

BillG,

We have thought about going to another bank/institution. Did
not think o the Farm Credit. But our land is not a farm though.

We do have another bank lined up if we run from the current
one. The problem with going to another bank is time. We
had wanted to break ground in January. I think everything
is lined up this time with the current bank, but I thought that
three months ago. If we go to a new bank it will cost us
another 3-4 weeks....

Going to a new bank is a possibility. If all banks perform the
PMI calculation the same, going to a new bank is not going
to help out that much. If they value the land correctly it
might make a difference but then it costs us time.

Thanks for the input,
Dan McCarty

 

[shoppintractors]

<font color="blue"> We have two lots, each
roughly 5 acres, that the bank said was ok to tie into the loan.
Short version of the story, is that after having these discussions
for literally years we are only able to use the lot where the
house will be built.
</font>
If the lots are next to each other you could combine them and make one 10 acre parcel.

Don

 

[millsnhills]

Dan,

Not sure which part of the Triangle you are going through but I am in Northern Durham (Bahama) and have had a great experience going through RBC. I am acting as the GC and am in the 2nd phase of framing.

When they did the appraisal for my land they based it on my purchase price for the land and the home separately with comps.

Jeff

 

[OkeeDon]

My son is an appraiser for a major mortgage loan bank, and does one or more of these loan appraisals daily (he averages about 45 per month). He was a fee appraiser (had his own shop) before he joined the bank. We've had lots of discussions about the appraisal process. In addition to staff appraisers, the bank also uses sub-contracted fee appraisers. Part of his job is to review all of the outside work.

I can't repeat on TBN the terms he uses to describe the work he reviews. He takes his responsibilities very seriously and simply can't use shortcuts in the appraisal process.

<font color="blue"> There are two other numbers on the appraisal. One the contract amount to build the house and the value of the land. The value of the land is NOT a documented comparable. </font>

The first thing he believes is that appraisers should NOT be told the contract values, whether new construction or purchase price. Too often, they simply adjust their own comparables to achieve the contract price. This negates the entire appraisal process.

The second thing he believes is that most banks don't care. Either they are doing the appraisal only to satisfy federal paperwork requirements, or, more rarely, like appears to be happening in your case, they want to manipulate the values to benefit themselves. Which is better for the bank -- to give you a non-insured loan for, say, $85K, or to be on the hook for only $75K and have the rest insured by PMI?

Third, the value of the land should be documented with comparables.

But, all that said, you're probably stuck. I'm sure the bank would not accept your choice of appraiser. After months of planning, you are probably close to being ready to build, and probably don't have time to start over with another bank; besides, you have probably already become obligated for the appraisal and other fees to this bank.

One thing I can think of would be to ask your county registrar of deeds if you could combine the two lots under one parcel ID, thus forcing them to use the value of the entire 10 acres. This might make it more difficult down the road, however, if you decide to sell one of the parcels -- there could be costs involved in splitting them up, again.

The only other thing I can think of is to do some of your own research, at the county property appraiser's office (many of them have public access to online data), coming up with your own comparable sales to indicate the value of the land. Either you will find that the $10K is pretty close, in which case you just have to pony up the PMI, or you can present your list with higher values to the bank, and insist they look again, or you will go elsewhere. From the sound of your negotiations with them so far, they will likely tell you to pound sand, so you have to be prepared to either go elsewhere or cave in.

I don't like the situation you're in, and my son would be angered once again at the members of his chosen profession. "They're _____s," he would say, using a term that describes prostituting oneself.

As for which method of calculation is used, that's entirely up to the bank. In my case, when I bought my commercial property, it was a house which I intended to rezone and convert to commercial. The bank agreed to an appraisal based on the future value of the property once the conversion was completed. the appraiser did a good job, and I was given a loan that was almost double what I actually paid for the property. They controlled the situation by requiring me to spend my share of the conversion (my equity) before they gave me the balance of the loan after the seller had been paid. Since I did most of the conversion myself, they also accepted the value of my sweat equity as part of that loan equity. I actually ended up with a small cash bonus as part of the loan, which helped in the startup of my business. Needless to say, I stayed with that bank until they sold out and became ______s like the rest of them.

{Edit} While I was writing this, some others came up with some of the same suggestions, and you mentioned that you had already done your own research. Sorry for the duplication.

 

[dmccarty]

shppintractors,

We could combine the lots. The problem with this is that
the appraised value on the land will be less per acre since 10
acre lots go for less money. And it would cost us more time
and another appraisal. AND, with the way they are doing the
land appraisal its not a given that it would still give us 20%
with they way they value land.....

The bank had led us to believe they would put a lien on both lots
to get the 20%. That way we would not have to combine them.

This was another issue we have with the bank. We have a
long list.... /forums/images/graemlins/confused.gif

Later,
Dan McCarty

 

[KubotaSteve]

I may not understand your statement correctly, but when I had my construction loan, I didn't think I was paying PMI since the last 20% wasn't paid until we closed on the permanent loan. I ended up paying PMI for a year and then refinanced and was free of PMI. Two different appraisers in a year's time were $40,000 different and I know the house did not appreciate that much and I hadn't added anything to the house yet. I would have went with the two loans if I would have thought about it to avoid PMI. Hindsight is 20/20. I did some figuring and it would have been less expensive to do the 2 loans and not pay PMI plus I would have had more equity in the house.