If you will have a mortgage on a home that you are about to build, or if you need a construction loan, the bank will require you to have an appraisal done. The lender wants to make sure that the value of the home equals or exceeds the amount of the loan they are about to provide. Even though it’s your home, should anything happen and the lender has to sell it, they need to make sure that they can get their money back.
The appraisal process can be a confusing and stressful process for the homebuyer building a home. They have many questions:
- Who manages the appraisal process?
- Why does it take so long?
- How can they appraise a home that isn’t built yet?
- What happens if my appraisal comes back lower than the lender says it needs to be.
Let’s learn about the appraisal process when you’re building a new home!
First, What is a Home Appraisal?
A home appraisal is a process by which a licensed appraiser conducts a thorough inspection of a property to determine the fair market value of what a home is worth. All lenders order an appraisal during the mortgage loan process so that there is an objective way to assess the home’s market value to make sure that the amount of money requested by the borrower is supported by the actual value. But, many homebuyers wonder, “How can you do an appraisal on a home that isn’t even built yet?”.
With a home that is to be built, the appraiser can’t look at the actual property. They have to take the information they are given and compare that with recent sales information for similar properties. The appraiser needs three things to establish the actual cost of the new construction, the quality of the new construction, and what is actually being built. They need the executed (signed) contract to build the home, the specifications for materials that will be used to build the home, and the actual plans of the home to be built. They then take into consideration the location of the property and how the neighborhood surrounding it will impact the value of the property.
Why Do I Need an Appraisal for My Home?
The simple answer that the lender requires it. Period. Home value is subjective and changes regularly, especially in today’s market of rapidly increasing building materials prices. But, in some markets, the prices could actually be going down. The bottom line is that a lender has to make sure that the value of a new home, especially one that isn’t even built yet, will equal the value that they stipulate.
In some cases, the loan terms may stipulate a loan to value ratio. What confuses many is that the actual price paid for the home versus the fair market value for the home will be different. The appraiser’s main job is to report to the lender what the home is actually worth in their professional opinion. The lender then uses that information to see if the actual value meets the stipulations in the loan approval. For instance, the lender may only be lending 80% of the value of the new home (not the actual cost to build it). If the home value stipulated by the appraiser is lower then required, the loan can’t be closed. There are some options we’ll talk about later.
How Long Does it Take to Get an Appraisal Done?
The timeframe varies widely. Today, because so many homes are being sold and appraisers are busy, it can take several weeks from the time the lender orders the appraisal until it is actually provided. However, the actual appraisal takes minutes or hours to do. The wait is in the backlog the appraiser has. With new construction, the appraisal process for new construction isn’t being impacted, but the current COVID conditions like appraisals for existing structures have been. Because the timeframes are averaging 2-3 weeks for many appraisals to come back, it builds stress levels in homebuyers as they wait to see if their dream home meets the value needed by the lender.
What Happens if My Home Doesn’t Appraise for the Value Needed?
The best defense is a good offense. What that means is, do everything you can before the appraisal to make sure you maximize the value of your home in the eyes of the appraiser. For instance, as a builder, we will work with your lender to create an appraisal package. It provides a better visual representation of the home through full-colored rendering and camera view of key high-value areas of the home so the appraiser can see the unbuilt home better.
There are several reasons a home may not appraise for the price being paid:
Rapidly Increase in the Cost of Materials – Because materials are rapidly rising, home prices are reflecting that rapid increase. Appraisers use comparable property sales to help in determining the value of your home in the appraisal process. Because realtors can take 30/60/90 days to input the actual sales prices into the Multiple Lending Services (MLS), a system used by realtors to help with home values and the real estate transaction process, that means you are paying the actual price to build a home today and it can be being compared to a home price for a sale that is 60-90 days old and not reflect the actual current prices in the area.
Lots of High-end Options – If you are packing lots of high-end options in your home, you may not be getting full value for their costs. The appraiser attempts to make adjustments in home prices for many options to reflect the added value in your home’s value. However, if you are building in an area that just isn’t filled with higher-end homes, it will be hard to get full value for them in the appraisal, which may cause the actual home value to be less than you are paying.
High-Cost Home placed in a Low-Value Location – In some cases you can be placing a bigger home in a neighborhood or location that is filled with lower value homes. That may help you with getting a lower-cost lot, but it also means that everyone else probably built a lower-cost home in the area. The appraiser is ideally looking for similar homes with a 1-mile radius of where you are building that sold within the last 90 days. If you build in low-value neighborhood, expect the location to drag down your expected appraised value.
But don’t give up! You have options if your appraisal comes in too low for your lender’s requirement. You will be given a copy of the appraisal from your lender. After you review it, here are some things you can do to still get your new home!:
- Appeal the Appraisal – Review the appraisal report to make sure everything checks out. Did they note all the property details correctly? Are the comparable properties cited in the report too far away from the home you’re buying? These may be grounds to appeal the appraisal. To start the appeal process, contact your lender.
- Make up the Difference with Additional Cash – A low appraisal doesn’t mean that the lender won’t do the loan. If you didn’t meet the lenders or programs required ratios for the loan, you could make up the difference between the appraisal value and the sales price with cash. You just have to meet the ratio required by the lender.
- Remove Low-Value Upgrades or Options– When you select options such as hardwood, granite countertops, or high-end cabinets, the rest of the neighborhood may not have them. In the appraisal, you may not be betting the full value you are paying for them. Determine what they are and removed them. For example, if the builder is doing hardwood floors and you can do them yourself later and save the cost in the contract, then delete the upgrade and bring the cost of the house down while still maintain value.
Don’t Stress About the Appraisal
There is so much to stress about when building a new home. The appraisal is outside of your control. Let the appraiser do what they are supposed to. Given them everything they need and present it so they see your new home in the best light. When you get the appraisal back and it comes in low, review it immediately. You are now armed with the knowledge and options to overcome what is hopefully a temporary setback!
Modular Means More
When you choose modular construction for your new home, not only are you getting the quality and speed that only it can offer, but you are also getting a home at a great value! In these times of rapidly rising building material prices and the threat of increasing interest rates, the speed of modular can help you get into your new home faster and beat what increases are coming down the road.
In addition, with the better value that comes from the efficiencies of modular construction, you know that you are getting the best opportunity to get into your new home and quickly start enjoying the lift in equity that homeownership during periods of rising prices can provide. Modular means more!