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Loan Pre-Appraisal vs. Final Appraisal


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Jerry's Forum Posts: 29
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By Jerry in Lee's Summit, MO on 2/26/2007


Just got back our construction loan pre-appraisal based on plans and specs.  It came in lower than expected but still well above our estimated costs (based on real bids on most items).  I'm curious to find out how the final appraisal compared, for those of you who have already completed.  I suspect it is rare that the final comes in lower, unless you didn't build according to the specs provided.

Jerry


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By Kenneth in Lees Summit, MO on 2/28/2007


Jerry, based on some local experience I can say that my final appraisal was higher than my construction loan appraisal.  How was your construction appraisal done?  My bank wanted my bids and estimates in order to appraise the value of the house.  However I refused to supply them, instead telling them I already knew how much it was going to cost to build but that I wanted to know how much I could sell it for at the end.  They balked, but in the end did it the way I wanted (probably more work for them, tough).  However at the end of the project, we needed a current appraisal as the bank servicing our construction to permanent loan intended to sell the mortgage.

Remember the appraisal is a lower-bound analysis intended to protect the person providing the loan (the ultimate mortgage lender).  Construction loans are higher risk, and I tend to think get a bit conservative with the initial appraisal to ensure that they can sell the mortgage when the construction loan is complete.  Bankers don't like unnecessary risk.  Unless something really odd would happen with the Lees Summit real estate market, which is currently the hottest market in the Kansas City metropolitan area (which honestly isn't saying much as the market as a whole here isn't that great), your final appraisal should be greater than your construction loan appraisal.  The problem in Lees Summit has been too many specs creating abundant overhead supply, and relatively low demand, but new specs seem to be the exception and not the norm.


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By Dale in Richland, AZ on 2/28/2007


Some additional comments to expand on what Kenneth said.

Historically owner-built homes are more likely to be behind schedule for completion and over budget. And the risk of the owner quitting in the middle of the project is greater. The bank wants to limit their exposure, making sure that there is more house there than they have money out for and if you bail out that they have enough money in the original construction loan to get the project to a saleable point so they can get their money back.

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By Anonymous on 8/8/2007


Our biggest beef in our short time of actually building our house and the closing was the appraisal and the PMI (Private Mortgage Insurance) We paid cash for our two acres, cash to have it cleared. We financed $230,000 for our foundation, 2,100 Sq. Ft. Ranch, driveway, sidewalks, patio, deck w/spiral staircase, brick to grade all the way around and brick in the front. Landscaping, final grade, grass seeding. We shopped our tails off and found great deals on everything, so the house will have all the bells and whistles. We fully expected the appraiser to tell us at least $350,000. She came back at $275,000. We needed the appraisal to come in at $289,000 to avoid PMI.

Personally, I think the system is corrupt, But I also understand that the bank has to protect their interest. Dale listed a lot of good reasons why they need to. But today we spoke to our lender and she did say we can pay $300 and have another appraisal after the house is finished and if it's over $289,000 the PMI will be wiped out so there is a glimmer of hope. As long as we stay under our budget and so far everything has worked out as planned or better.

One thing I would recommend to all new owner-builders is never stop shopping. Even after you do a takeoff and decide on a materials supplier, keep looking. Today we found a deal on our architectural shingles for $40 less a square than our supplier. Times 18 squares - that adds up. Plus this supplier gives you a square free with every five that you purchase. They also were about $9 per piece cheaper on their composite decking. So you never know when a deal will pop up, but today just by checking our suppliers like we do every week we saved close to $1,500. We also found another spiral staircase dealer who is about $1,800 cheaper than our first three bids, so that is $3,300 in savings in less than 24 hours. Be vigilant - it pays.


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