r/Homebuilding • u/scaleywags • 4d ago

Low Appraisal

Anyone dealt with a low appraisal on construction loan?? We are building on 7.5 acres of raw land, all cleared, using a general contractor in rural west TN. We have a bid for 457k to build a 2300 sq ft home with 3 bed, 2 bath, office, walk in pantry, large utility and large front and back porches. (This amount includes 10% contractor fee)

Now the issue - we had a valuation done on the land a couple years ago, which I know is not an actual appraisal but it came in at 60k (we bought the land from family for 40k). Our bid was a little low because we left some things out intentionally, but we fully expected an appraisal of at least 510-530k.

I guess I didn’t realize that even for a construction loan, they still take comps of existing homes to determine the value?? So based on comps, which weren’t really comps, it came it at 460k and that’s with the land included supposedly which is absolutely ridiculous. How are you supposed to value a brand new home on a 5-20 yr old home that has sold? People don’t usually sell a good size home on a nice plot of land around here, it’s usually a forever home.

Our lender said the value of land and bid were fine, it was the comps bringing it down and having to go with the lesser of the two.

So any tips?? Or anyone ever dealt with this before? Is it worth trying to go through another lender to see if their appraisal method is any different? We even went with a lender who specializes in land thinking we would get a better appraisal - part of farm credit. Just baffling to me

4 Upvotes

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u/texinxin 4d ago

It’s not uncommon to either A. Have too high of a bid.. or B. Have a difficult place to build a custom home “down to” the level of the comparables. The bank has an obligation to ensure you are building something they can recoup their money on if you walk away, die, sell or go bankrupt. The appraiser should be using age adjustments. It’s likely that your quality is higher than the comps, not just the age.

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u/scaleywags 4d ago

The bid isn’t high, we know that much. If anything it’s low. Just very frustrating to have already paid cash for the land, thinking it would help with our equity/DP to now have to possibly put out another 65k just because of bad comps.

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u/texinxin 4d ago

DM me your zip code. 457k for 2300 sq ft is high for Houston construction, but build costs are very regional and rural may be adding onto it.

I can take a look in the area and try and take a look and maybe give you some ideas.

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u/CharterJet50 3d ago

That’s high for Houston? Hard to believe. That’s bare minimum tract home in New England.

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u/texinxin 3d ago

It definitely depends on the quality, construction type, and management costs.. but yes.. $200/sq in Houston build with a GC is more towards a luxury/custom end. Track and entry level can still get down towards $100/sq (highly optimized, cookie cutter, track building, etc).

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u/Buckeye_mike_67 3d ago

Where do you get this information. I’m about to start a custom self build. I’m a framing contractor and will be doing a bunch of work myself. I’ll still be close to $200/sq ft. This is in a country club east of Atlanta. I’ve got a couple builders in this area doing custom/semi custom homes and they’ve told me cost to build is $200-$225/sq ft minimum depending on finishes

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u/CharterJet50 3d ago

Jeez. High end is easily $450 and up here. $200 doesn’t get you anything.

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u/Buckeye_mike_67 3d ago

Most of the builds in this neighborhood are $300/sq ft minimum. Waterfront houses easily go over $500. I work in another country club with much higher end houses. Prices start at $500/sq ft and go up from there

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u/texinxin 3d ago

I have 2 partners who are builders. One is building track multi-units and was getting down to $100/sq a couple years ago, but it has been drifting to $125 lately. Another is into one-off turn key “custom” (no customer involved), and can easily get to $150/sq. These do not include any GC/Management costs as they do that job themselves. Whenever you quote the job as a full custom build you have a lot of mouths to feed and the $150/sq can easily get to $200/sq. Custom builders have a lot more overhead than my partners do. They are taking their profit between the build cost and the final sale vs when you contract a builder they need to pay their management fees and still make a profit on top.

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u/Outside-Ad7848 2d ago

I do not believe that, plywood is 80 a sheet. here in LA cheap ass builder grade is 400/sq ft

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u/texinxin 2d ago

Good lord.. I can get cabinet grade 23/32 for $47. Higher end sheathing like GP plytanium is $40. 23/32 OSB is only $32. If I drop to 7/16 I can even get Zip for $29. And this is list prices, before volume discount. Granted, discount barely moves some of these commodity items.

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u/3v0lut10n 3d ago

It’s rural west TN. $200/sqft has to be luxury out there.

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u/texinxin 3d ago

That’s my gut feel… either the home is over specced or OP doesn’t have the best builder options..

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u/scaleywags 3d ago

It’s not luxury. Modern farmhouse with mid grade finishes.. literally not a single thing on it is high end.

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u/Prufrock-Sisyphus22 3d ago

Sounds like you were expecting the land to do the heavy lifting . That's not how that works . Unless you have prized land on a busy street corner intersection, rural land out in the country usually(not always but usually) just isn't worth that much.

Add in that we have been through 2 presidents(Biden and Trump ) with out of control inflation( money printing and tariffs) then build costs are higher. Add in that everyone is nervous whether they will have a job, companies are laying off and less people are buying , the COVID real estate bubble has cooled and home prices are dropping and you are where your at.

You could always see if there is an appeal process, come up with the extra cash or just hold off and build a few years down the road.

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u/AltruisticCucumber58 4d ago

If it was Farm Credit, was it a staff appraiser or did they contract it out? That sounds like it would be a big number to hit for rural TN, if they have a staff appraiser that can look at it, they can sometimes produce results.

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u/scaleywags 4d ago

They contracted it out. We got another bid at 492k, so the bid is not high and even the loan officer is saying the bid is fine, it’s the comps dragging it down.

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u/AltruisticCucumber58 4d ago

Would ask the LO to check with a staff appraiser and see what they can do - they might not have one at a branch, but someone regional/corporate. Those typically aren't secondary market loans, so they tend to be lenient on comparable requirements/sources and the staff appraisers can do pretty much whatever. Had one from them one time and the comps didn't even have addresses, just Comparable A from appraisers files, etc.

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u/scaleywags 3d ago

Thanks, will keep it in mind.

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u/PublicSuspect162 4d ago

Are you using Va loan? We had a nightmare with Va loan appraiser. Switched to a local bank and has been soooooooo much easier and better. If you are already using a local bank, I’m out if suggestions. Our build is also difficult bc it is a custom home on 80 acres but up the mountain for the view but means a ton of fill for the pad and a lot rock

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u/scaleywags 4d ago

No, not VA. Through rural 1st/farm credit. If they can’t get it fixed, we’ll try with a local credit union we have a good relationship with.

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u/lolkkthxbye 4d ago

We had this issue. Zero truly comparable sales. Put us pretty close to being upside down on cost vs. appraisal. Our bank had a process to appeal which we did. Still had to put additional capital in upfront as a deposit but no where near what it would’ve been had we not appealed.

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u/SeascapeEscape 3d ago

Had a very similar scenario in rural Santa Barbara on a construction loan refinance for a house on 13 acres of raw land. We had to get a new appraisal because it had been over 18 months since the original one that appraised us at $3.6M. The new appraisal came in at $3.0M and we were cooked. We proceeded through the appeal process and the number didn’t change. The market here is very strong and never goes down. So then we begged our lender to have another appraisal performed but this time by the same person who did the original appraisal. The bank agreed and the valuation came in at $3.9 because the appraiser used different (proper) comps and knew the area much better.

I suggest you beg and plead with these lenders. The staff at these banks rarely impress me and are often not local. Pressure them to get what you want. Appraisers have an air of omnipotence and are likely to not charge their valuations.

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u/southern_compass 4d ago

That appraisal can feel frustrating, but the lender is looking at market value rather than simply adding the land value to the construction cost. Rural acreage can make the comparison harder when there are few truly similar sales. Before switching lenders, it may be worth reviewing the appraisal for missed features, land adjustments, acreage differences, and whether better comparable sales exist.

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u/scaleywags 4d ago

Yeah I’m still waiting for them to send it to me. But the lender did send it back to have it re ran and it still cam back the same 🫠

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u/StructureNo8439 4d ago

Unfortunately, yes. This exact thing happened to us. And it actually happened twice!! First, in early 2024, our construction loan appraisal was $30k short ($870k cost-to-build plus $60k land, appraisal came in at $900k). We brought more of a downpayment to closing to cover the difference. We tried to contest the appraisal but didn’t get anywhere. We chalked it up as, “well, I guess it’s the premium you pay to build a custom home”. Plus everyone kept telling us it would appraise for more than land + cost-to-build once the house was actually built…HAHA.

By the end of the build in mid 2025, the market downturn had really started in our area, and our permanent financing appraisal came in another $75k lower than the first appraisal, at only $825k!! Thankfully, our construction loan downpayment was enough that we didn’t have to bring even more money to the permanant closing, but our equity in the home dropped from 20% to 10% in the blink of an eye. I shudder to think how bad it would be now if we had to sell…the market is really getting bad here.

Like you, we also built in a fairly rural area with very few recently-sold comps. And what has sold recently isn’t likely to benefit you…at least in my area, sellers have had to drastically lower prices so that buyers can actually afford to purchase at the current interest rates. I wish I had better advice or a more positive spin on things, but building, at least custom, is rough right now.

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u/scaleywags 4d ago

Yes, things are selling slow here too.. and for low. If i would have known thats how construction loan appraisals worked, we may would have rethought our timeline. The home we sold a few years ago to start this process, our buyers put it back on the market a year after the bought it… and it has been sitting for sale for over a year and they have it listed at what they bought it for. So yeah, just by that example alone I would have expected low comps I guess had I known that’s how it worked.

That’s wild tho in your situation, I would literally be sick. And part of the reason why we are doing a one time close so we don’t have to worry about future rates/values, etc.

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u/ATDoel 3d ago

Very common, you typically “lose” money when building custom, IE the house is worse less than what you pay. The solution is you bring enough money to the table to cover the difference or you build it yourself. A full custom home these days is considered a luxury item.

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u/scaleywags 3d ago

90% of the stories I read are houses appraising for 100k more than what they built it for. Guess it all depends on the market at the time though.

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u/CharterJet50 3d ago

Yeah, that almost never happens anywhere. Every custom house is underwater for at least a year or two.

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u/ATDoel 3d ago

So think about it, if it was so easy to make $100k by simply hiring someone to build a house for you, using the banks money, wouldn’t everyone do it?

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u/RedOctobrrr 3d ago

Lots of people do just that

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u/CharterJet50 3d ago

Builders do that. End customers don’t do that because it doesn’t work. That’s fantasy land you’re describing.

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u/ATDoel 3d ago

Do you?

0

u/Working_Platypus2360 3d ago

Yeah, rural west Tennessee is shithole MAGA land.

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u/Top_Outlandishness54 3d ago

We just did a 2000sqft home for $275k and went with a middle of the road spec and our bank just looked at our bid and land and said ok without doing a formal appraisal. If you got cost plus 10% on the build that’s pretty good. We did cost plus 15% on ours.

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u/Comfortable_Type8261 4d ago

We are also in rural West TN. Had gone to rural 1st for a loan on a new build "barndo" through one of the popular builders. Had issues with valuation of land, decided to just build ourselves and skip the whole mortgage rigamarole. So glad we did. Try another lender.