In the housing market the appraised value of a home is the “line in the sand.” If you are paying less for your home than the appraised value of the home, then you already have equity in your home. If the appraised value of your home is lower than what you are paying for it, you have a problem. Lending institutions will not loan more than the appraised value of a home.
Recently the appraisal process has under gone several changes due to the collapse of the mortgage industry. Because of these changes, low appraisals have become more and more common. We had a home appraisal come in lower than our cost to build the home! How is this possible? The biggest hurdle we face as a general contractor during the appraisal process is the comps (comparables). To help determine the value of a home, appraisers look at local sales of similar homes. There is a good chance the appraised value of your home will be based indirectly on the sale of a foreclosed or short sale home.
So, what can we do to justify the price of the home and ensure the appraised value of your new home is adequate to help you get financing? Speak with the appraiser. Banks are no longer allowed to have any relationship with the appraisers, general contractors however can. A lot of times, we will request that the appraiser come to our Sales Office. By doing this, they can tour our models to evaluate the quality of our work. We can discuss the specification of the building project. Many times we will visit the site with them to point out any value adding details on the property. After the appraisal, if it is still low, we can request a copy of it to review. By pointing out anything they may have missed such as hardwood flooring, the appraisal may be adjusted.
Here are some links to help you better understand the appraisal process:
http://home.howstuffworks.com/real-estate/home-appraisals.htm This article is a bit older but has a lot of information. This was written before changes were made to the appraisal process. The article refer to the relationship between lending institutions and appraisal companies, this is no longer allowed.
This is a link to a USA Today article regarding the appraisal process and the debate about whether there is a problem or not:
Question: What happens if during the building of your new home, there is a fire? You have closed on your construction loan and the bank has made several dispersement payments for the construction costs. You now have a mortgage but no home, who covers the damages?
Answer: Your Builder’s Risk Insurance Policy.
Most banks require that a Builder’s Risk policy be in place at the initial closing of a construction loan. They want to ensure that their interests (the money loaned for the project) are insured in the event of a catastrophic loss during the construction of a new home. Builder’s Risk Insurance is a physical damage policy that covers all phases of construction. From the moment equipment arrives on site to occupancy of the home. Some of the losses this insurance covers include theft and vandalism, water, fire and weather damage. This coverage is for the interests of the General Contractor, sub-contractors, bank and homeowner. Each policy is project specific and should be reviewed between the General Contractor and homeowner.
Does your G.C. have Builder’s Risk Insurance?
For more information, check out these links:
With record low interest rates, tax credits, rock bottom prices on land and construction fees…. All you have to do is find an out of work builder to give you a lowball price and you’ll be in your new home in no time, right? Better think again.
You know the time has come to make a change. You know it’s a smart financial move to build your new home. Yet, bad things happen, especially to the uninformed. That’s why you have to do your homework before you select a builder. You can make a great choice, if you know the right questions to ask.
At the beginning of the process, it’s easy to be swept up in the excitement and anticipation of having a brand new home. However, that’s the most important time to focus on the nuts and bolts. Time spent asking questions will save you money and heartache later on.
Attorney David Dow in Norway, Maine has seen too many situations fall apart because of inadequate planning. “We see situations where the homeowner is left high and dry,” warns Dow. “It’s very enticing to go with the builder with the lowest price but that can also leave you in a mess. We often see cases where the builder has run through al the money and can’t pay the subs to finish the job because he didn’t know how to properly quote the project. Low bids aren’t always indicative of good business people.”
According to Bryan Brznowski, owner of Cottages to Castles (www.cottagestocastles.biz) in Iron River, ME, it’s important to pay attention to how you feel when you talk with a potential builder. In other words, listen to your gut, your inner voice, your instincts… whatever personal gauge you use. At Cottages to Castles, our goal is make every visitor feel welcome,” Brznowski explains. “I want the visitor to know they are important to us. I want to get to know them, to know why they want to build, what outcome they envision and how we can help make that a reality. Even if they aren’t ready to build today, we want them to know we value their visit.”
Here are six key areas to look at when comparing builders.
1. How professional are they? There are a few critical ways to evaluate the builder’s level of professionalism.
- How long they have been in business?
- Do they have an office you can visit or do they operate out of a pick up truck?
- Is there a showroom or a display model?
- Is there an office with staff to answer phone calls during the day?
- Do they have insurance?
2. What is their track record? A reliable builder is proud to show their work. Ask your prospective builders to talk about projects they’ve completed.
- Can they give you names of recent customers?
- Can they show photos of previous work?
- Can they give you names of happy customers from the past?
3. What do they know about building code standards? Building codes are designed to protect the homeowner but not all codes are the same.
- If they do not conform to the National Building Code, what code does your builder conform to?
- Who will handle inspections as your project progresses?
- Will you see any inspection reports?
4. Does your builder work with an established team or whoever is available?
- How experienced are their sub-contractors?
- Who will manage the schedule of the subcontractors?
5. Is there a formal contract or just a handshake? Take a very close look at the details of the contract. Many states require very specific language. If that language isn’t there, it’s not a valid contract. Consider asking an attorney to review the contract for you.
6. Can they give you a final price and timetable in advance? Are you working with quoted final pricing and time frames or estimated? (There is a very big difference between a quote and an estimate – quotes don’t change, but estimate do!) Most builders work on more than one project at a time. Ask what other projects might impact the completions of your home.
“Work with a builder that has experience, good references, and an established reputation in the community,” recommends Dow. “Ask for names of their last three customers. If they are happy, chances are you will be too.”
Are you prepared to make the right choice? Schiavi Home Builders advises customers to compare builders carefully before deciding. “Ask questions. Look around,” Scott Stone suggests. “Ask to see examples of their work and talk to past customers. Visit our website and borrow the checklist we’ve created. Then go visit a few builders and interview them.”
Article written by: Paula Mahony