Appraisal Problems with New Construction
Over the last few years, obtaining financing has been one of the most difficult problems for builders and customers. Not only have many banks been unwilling to lend, their appraisals for new construction have fallen so much that willing and qualified buyers have been unable to get sufficient financing.
The market is now greatly improved and continuing to get stronger. More and more banks are willing to lend. But appraisals for new construction can still be a problem. The reason is that the sale price for a “comparable” existing home is often considerably less than the cost of building a new one.
Three Reasons Why There Are Still Appraisal Problems
There are three reasons why new homes cost more than existing homes. Land prices have remained steady in most places because land is a scarce commodity. As Mark Twain pointed out, they don’t make it any more. The percentage drop in the cost of construction labor, where it’s happened, isn’t anywhere near as great as the percentage drop in the price of existing homes. Few construction workers will accept a 40% pay cut. What has been especially surprising, even to seasoned builders, is the sharp spike in material costs. The increase has been fueled by an uptick in remodeling and commercial construction. The three of these factors keep the cost for new construction higher than for existing homes.
Appraisals for new construction are based on comparing the proposed new home to recently sold homes similar in size and features. Since most sales are from existing stock, appraisals for new homes are often less than the cost to build them. This often prevents banks from lending the full amount needed by the buyer. Unless the buyer has sufficient cash to offset this shortfall, they can’t get a loan for the amount they need to build their home.
Minimize Appraisal Problems by Selecting Optional Features with High Value
So what can you do about this? It always helps to select optional specifications that add the same value as they cost. It helps even more if you choose features that add more value than they cost. Enlarging a modular home, for example, will almost always add more value than it costs, since factory assembly lines are very efficient. On the flip side, removing something that costs more than it adds in value will also bring the cost more in line with the appraisal. For example, replacing fiber cement siding with vinyl siding will substantially reduce the discrepancy between cost and appraisal. The appraised value of vinyl and fiber cement is comparable in most communities even though fiber cement costs much more. Similar results can be achieved by selecting vinyl windows instead of wood windows or by eliminating cathedral ceilings.
Minimize Appraisal Problems by Adding Other Work with High Value
Adding something you might not need, or didn’t want until the future, can sometimes increase the appraised value more than it costs. For example, if you select a cape design with one or two bedrooms on the first floor and an unfinished second floor, finishing a bedroom or two on the second floor might boost your appraisal substantially more than it costs. Of course this assumes you can afford the additional construction. Building your garage now rather than in the future might stretch your budge more than you prefer, but it may also be the only way to eliminate your appraisal shortfall.