According to American Log Mortgage, "One of the most misunderstood parts of the financing process for log homes is the appraisal. Many borrowers do not understand the appraisal process, therefore they do not ask any questions of their prospective lender when they are shopping. Often people will only learn the impact of the appraisal after their chosen lender wastes weeks or months and ultimately cannot complete the financing."
American Log Mortgage has prepared the following tips (click below) to help you better understand the appraisal process and possibly avoid some of the common roadblocks. . . .
Real estate appraisers are independent parties, not associated with your bank or lender. They will act as a disinterested third party to report current real estate market conditions, based on research of recent resale.
Before the appraisal process can begin, the appraiser will need a copy of the plans, a copy of the quote/contract from the general contractor detailing the actual work to be done, a copy of the log kit quote/contract and a copy of the deed (if the land is owned). It usually will take 2-3 weeks for an appraiser to complete their report. Since the new home and land is the collateral for the loan, your lender will rely on the appraisal to determine the marketability of the home (in the unfortunate case of default or foreclosure). Conventional mortgage underwriting will require receipt of an appraisal showing at least three comparable resales from the most recent twelve months.
Below we have highlighted several potential appraisal issues.
Exclusively Log Home Comps - Many banks or lenders that do not specialize with log home construction will require exclusively log comparables for your appraisal. This requirement will severely restrict the appraisers search for comparables. There are two very common problems that can arise with this type of underwriting guideline.
- First, there simply may not be any other log homes in the area of the subject property. Therefore, the appraiser cannot meet the order.
- Second, if there are log homes in the area, they may not have been resold.
An appraisal is based on resale of homes and it is normally uncommon for log homeowners to sell their dream home. As a result, you may have other neighbors with similar size log homes on similar size lots, but they cannot be used as comparable properties on an appraisal. This restriction is the most common roadblock that borrowers will experience as they seek construction financing for their log home.
American Log Mortgage understands the log home business, so we will not limit the appraiser to only log home sales. Since a log home is a custom built home, we will accept other custom homes as comparables. In other words, if you are building in an area where there are no other log homes or there are no log homes that have sold in the past twelve (12) months, we will be able to accept other construction types that are considered similar in quality and appeal.
Large Acreage - It is extremely common for people to plan their dream log homes in areas away from the hustle and bustle of city life. Often, they will desire large open spaces that can provide quiet and privacy. Sometimes owning excessively large acreage may cause trouble or difficulty when ordering a construction appraisal, though. While a log home will always be unique, the overall property must still be “common” for the area real estate market to meet conventional financing requirements.
For example, let’s say that you are planning to build a 2000 square foot, 3 bedroom, 2 bathroom, ranch style home and own 30 acres. When the appraisal is ordered, in order to count value for all the acreage, the appraiser will be required to find resale of other ranch style homes that are approximately 2000 square feet with 3 bedrooms, 2 bathrooms that sit on about 30 acres.
The size of the home and rooms would be common in most markets, but would you normally also find them with 30 acres? If not, the appraiser must adjust the value of the best available comparable properties. For example, they may find a 1900 square foot ranch with 4 bedrooms and 2 ½ bathrooms, but it only sets on 2.2 acres.
Now, the appraiser will adjust the comparable property to be more similar to the subject property by adding or subtracting from the actual sale price. In this case, the main glaring difference would be the difference in acreage. The appraiser would need to adjust the value of the 2.2 acres to be more similar to the 30 acres by adding value for the difference in acreage.
The problem comes when the total adjustments exceed acceptable limits for conventional mortgage underwriting. If excessive adjustments would be a problem and prevent the mortgage from meeting underwriting guidelines, a solution can be achieved by subdividing the total acreage and include only a portion of the total acreage. However, if the borrower is relying on their land value for down payment, this may limit the amount lot equity that may be needed to cover the down payment. Thus, it could mean additional cash due from the borrower at closing.
It is very important to understand how your land value will be appraised. Many banks and lenders will only allow a 5-acre maximum for their appraisal. At American Log Mortgage, we are conscious of the impact of the land and will ask questions and help to make sure you avoid surprises.
Over-improvement or Overbuilding For Area Market - Appraisers will sometimes consider new homes “over-improvements” when the construction costs involved cannot be supported by area sales. Again, the appraiser needs to find comparable properties (similar square footage, similar style, similar acreage, and similar amenities) that have resold in the immediate area with the recent twelve (12) months. If there are none available, the appraised value may come in lower than the cost of construction.
For example, let’s assume the planned subject property is 4000 square feet and cost of construction will be around $600,000 on land valued at $100,000. However, the best comparable sales in the area are only around 2,100 square feet with similar acreage and typically maximum sales have been $250,000. Although the new home may cost $600,000 to build and should have a value of at least $700,000, the appraiser would not be able to support that value without making excessive adjustments.
In this case, the appraiser may only give value for the new subject of $400-$500,000. This is not a comment on the quality of the home, but an estimate based on current market, showing the highest price a future buyer from that area might pay for the home if it was resold. This could be an issue for the borrower regardless of the type of construction (brick, log, timber frame, stick frame, modular).
1-Bedroom Floor plan, Below Grade Living Area and Unfinished Rooms - It most markets it will be very difficult for appraisers to find good one bedroom comparables. Generally, the marketability and/or resale for this type of property are very limited. Therefore, sometimes there may not be any comparables available. More often, the comparables located will not support the value for the new log home.
Sometimes the floor plan has additional bedrooms, but they are going to be below grade or in the basement. An appraisal, though, is based on the livable square footage that is above grade. Therefore, the bedrooms in the lower level will not add to the room count or total square footage.
For example, a ranch style home with an 800 square foot main level, including one bedroom and a one bathroom. The floor plan also includes an additional 800 square feet with two bedrooms and a bathroom in the lower level. For appraisal purposes, this home would be considered an 800 square foot, one bedroom, one bath home (even though there is additional finished space in the lower level).
Thus, the appraiser will need to locate resale for other one bedroom, one-bath properties. This same situation can occur if there are unfinished bedrooms on the main level. If the livable square footage includes three bedrooms, but only one will be finished, this again would be appraised as a one-bedroom property. Unfinished rooms cannot be included.
Unusual Power, Heating or Sewer - Anything that would be a standard component of a completed home that would not be common for the real estate market can cause appraisal issues. For example, use of generators or solar power as the main source of energy. While it is certainly viable and cost effective, it also would force the appraiser to find other homes that have resold with the same type of energy. The same could be true for homes that have planned heating with wood or coal burning stoves, rather than other traditional heating systems. If an appraiser can find comparables, there is no problem. Normally, however, these will be difficult or impossible requests.
Lack of Sales - This is a condition that no one can control. Appraisals for conventional financing normally require a minimum of three comparable resales from the most recent twelve (12) months. From time to time, some people will unknowingly plan to build in an area that has experienced limited or no activity. Of course, this is rare, but can be an issue that complicates availability of financing.
"If you are unsure about the market where you plan to build, contact an appraiser and discuss the project. It is better to address these issues in the beginning/planning stages."