I’m in the middle of a long term building project containing a house, barn, and other support structures on twenty-eight acres. The house is currently framed and it’s time to go back to the bank for more money, but the appraisers don’t seem to like the idea of open architecture. While the house has a kitchen, dining room, living room, den/office, bedroom and bathroom, the appraisers seem to only be able to count to three, the bedroom, bathroom and the other room. With all the open architecture homes that Fine Homebuilding publishes, someone must know how to value these things. Can anyone help?
Discussion Forum
Discussion Forum
Up Next
Video Shorts
Featured Story
Listeners write in about haunted pipes and building-science tomes, and they ask questions about roof venting and roof leaks.
Highlights
"I have learned so much thanks to the searchable articles on the FHB website. I can confidently say that I expect to be a life-long subscriber." - M.K.
Replies
Something sounds as if it's being left out in your post.
Of course, we all feel these appraisers have their heads up the wrong chute from time to time. But this "open architecture" you refer to... Does it have another definition? Timberframes, log homes, as well as many contempory building all have "open architecture" and they have little or no problems with the bank. My current home has 3 or 4 rooms meandering together. I had no problems.
What's the "Rest of the Story?"
If it's not vinyl clad, has four corners, hip roof and square rooms, banks assume it's a freak and no one would ever buy it.
We recently had some friends go through a huge mess with an off-grid dome house. We've been beginning the process of looking into building a concrete 'open architecture' home. Yet, the biggest hurdle appears to be the banks inability to understand architecture (not to mention the inspectors) beyond what they see in better homes and gardens.
That said, loft condos are pretty much what you describe. You may want to check with an appraiser that does that line of work?
The project sits on twenty-eight acres in the country (strike one?) so it can't be securitized and resold to GNMA, FNMA, for Freddie-Mac so the bank has to portfolio the loan rather than package and resell it. The house is a gambril roof structure with split face block for the lower portion which houses a 2400 sq. ft. garage with 13' ceilings and has it's own gas forced air furnace. The house is about 1800 sq. ft. tucked up under the roof making up the second floor. To maintain scale, the west end has an 8' X 8' Pella designer series sliding glass door with 3' X 8' sidelights making 14' of glass, out onto a two level deck most of the west end of the house. The other windows are similarly scaled although double hung in style again all Pella designer. The siding is rough cut cedar applied vertically and stained on both sides prior to installation. The ceilings are scissor trussed which makes for semi-cathedral expanse and other than the bedroom and bathroom, the rooms are defined only by floor coverings and lighting (both recessed and fixtured), making comparability somewhat more challenging (strike two?). Finally, the house features a variety of built-ins, from McIntosh stereo to Sub-Zero refrigerator/freezer and large screen TV entertainment center with home theater sound. We are also using extensive insulation for both thermal value and sound deadening between rooms, 5/8" drywall throughout along with structured wiring for telephone, data, video, etc. Even the barn is included in the network. I think these things all add value, even the twenty some acres of mature oak, maple and beech trees that make up the woods and could be commercially harvested if I didn't want them for screening. The problem so far is that I haven't met an appraiser that wants to look at the big picture, they seem to only want to count rooms as defined by walls and they are sufficiently busy with refinancings that they don't seem to want to slow down to think. Could the need to think be strike three?
I had a friend once whose home was appraised at less than she had put into it. The appraiser explained to her that the things she thought were adding value (custom lighting, higher quality finish materials) didn't add value as far as the bank was concerned, they just made her home easier to sell. It sounds like you are having a similar problem - you want the bank to help finance finishing details when those don't matter to them. The appraisals I have received have all been based on location and square footage. I've even had them do appraisals without actually entering the home (they just measure the outside, count chimneys and look at the MLS). I've not had problems with them failing to recognize rooms in an open floor plan.
I agree that finish details should add to the value of the home. However 1800 sq ft is a smallish home by today's standards and the folks buying in your target price range are going for the larger McMansions, which makes it hard for the bank to resell a foreclosure. I don't think it is your open floor plan, per se, that is causing you problems but the sum of the whole - you are looking for more money than the average 1800 sq ft home commands. I read 'The Not So Big House' with great interest, but Ms. Susanka failed to adequately cover how difficult financing one of these gems can be. Homes without formal dining rooms may meet our lifestyle, but they make it darn hard to get financing. Good luck with the next appraiser.
Rich,
I'm an appraiser working for a large nation lender. Lenders shy away from homes that are "unique" to the market. The reason is they have had bad experiences trying to sell foreclosed properites that are unique.
My company sells loans to investors. The investors have the money, so they make the rules. I would look for a small local lender that does not sell its loans, but holds its own paper. They have greater flexibility in lending on unique properties.
Good Luck!
Mike
My own loan is with a small local bank. Even they have gotten shy of somne unique things because they have been burned too often. Higher down payments being required.
Appraisers have more to go on with completed structures which it appears that you cannot offer them.
Remember that the bank is putting money out on the market more than they are investing in pet projects or people's dreams. That market sets the model in which they operate.
Excellence is its own reward!
"The reason is they have had bad experiences trying to sell foreclosed properites that are unique."
Is that the 'real' reason, or do banks just assume they couldn't sell them?
We'd really like to get ourselves into a more modern home...not unlike many of the fine homes highlighted in Fine Homebuilding. Talking to people we know, we find that we are not alone in wanting something unique, different, and built well.
I can't imagine not being able to sell any of the fine homes in Fine Homebuilding.
While 90% of the general population may want the McMansions, there's that 10% that are desperate for something different. ;o)
Maybe this is a role for Architects to get into. Start offering financing along with design services.
Yes, it's the real reason. For obvious reasons, I keep a close relationship with my banker. It is a small private bank. They have gone out on the limb to help loan to local people, many of them DIYs needing a leg up as did I at the time.
In this small town, they have been stuck no less than four times in four years with partially finished houses built on unique designs and construction methods. One was by a so-called builder and the other three were DIYs. I would estimate that this was out of about twenty small residences built in that time. They had to go through the costs of repossesion, holding, and reselling. In each case, I know that it was a lose for them. They are not in the business of construction so the fastest turnover to cut losses was what they were looking for.
I rebuilt one of these for the new owners. Another is still in the process of re-construction after threee years. this bank is much more strict now about who they loan to and how they approve the loan. I was asked privately for opinion on two new applications..
Excellence is its own reward!
My "main event" career, is as a CPA finance guy, that just happens to favor building as a left over from working in the trades when I was in the Navy and before I finished college. I am looking at the commidization of money by the lenders, but that is not making conformance with a "cookie-cutter" an appraiser can appreciate any easier. When the project is completed it will boast a host of high quality features from real hardwood flooring to killer built-ins from McIntosh stereo to large screen home theater. The problem that is being voiced is "room count" and "comparability". My conceptual problem with an appraisers' lack of vision is that much of the Williamsburg reproduction brass lighting, electronic components, etc. are already here just waiting to be installed. The other problem is that the project sits on twenty-eight wooded acres so the loan can't be securitized and resold, making the banker have to think too.
My "spec house from hell" also has a sort of open floor plan. When it was appraised last time, I walked through it with the appraiser and defined the spaces. The kitchen stops here, the dining area stops here, etc.
Might help them if you define the spaces a bit with changes in floor coverings, a short railing, or something like that.
The qualities that most attract a woman to a man are usually the same ones she can't stand years later.
So far, the one appraiser that has been here wasn't interested in discussing details. His opening comment when we met in the yard was "show me what brings value to this house". Things seemed to go downhill from there. Recessed lighting, hardwood floors, carpeting, ceramic tile, 1/2" glass walled shower enclosures, McIntosh "built-in" stereo or home theater with large screen TV separate entertainment centers, Virginia Metalcrafters "Williamsburg" reproduction chandeliers, wall sconces, etc. held no interest whatever. Even the structured wiring for data, phone, etc. didn't seem to matter and the appraisal showed it.
Usually open architecture has some finishing details to help define the space. Is the appraiser unwilling to look at the plans that inform of these architectural elements? If you are planning to use builtins or floor coverings to define these spaces it might be difficult for the appraiser to envision it with just a frame. Why not frame up some temporary walls, or even half-walls to help him or her along. $100 or less spent now is small potatoes compared to what you are looking for. You can reuse the lumber later on one of your support structures.
I am using ceramic tile flooring in the kitchen area, carpeting in the dining area and transition to the living area and den / office. In the last two spaces I am using 3/4" tongue and groove oak hardwood. I have been considering sofiting the kitchen but it is not on the plans, and I have been considering box beams for the living / den areas. The architect left out those details but mentioned them in text to give us some options when we got on the site and we could see how the thing came together. We have used a 42" wall section between the kitchen area and a breakfast bar that backs up to the kitchen cabinetry forming an island. My personal belief is that there are so many refinancings going on, that the appraisers don't want to have to think about the project, they just look for cookie cutter work to crank out. The key word that keeps popping up is "comparables" and it seems they don't want to have to look for any. Since it is not part of a tract development and they have to look farther than next door, it represents extra thought. To complicate matters, it is on twenty-eight acres and therefore can't be securitized and resold to GNMA, FNMA or Freddie Mac making the bank have to think about portfolioing the loan instead of reselling it. A glass contractor that I work with suggested the walls that come down later also, so I have added that to my list of possibilities.
Some memory shadows made me go back and review my appraisal.
Introductory remarks include a statement that three approaches are recognized.
Income approach is based on anticipated income derivable from the property and might be used for business property such as an office building or mall.
Cost approach is regarded as the most accurate. Howevere, since you do not have it finished, you cannot substantiate your actuall costs.
comparables is the only recognized accurate measure of market conditionbs to establish value. As you are already aware, comparables for a rural property on several ares with outbuildings are very hard to find. especially since six months seems to be the cutoff line for accuracy.
As the economy slows, bankers become somewhat more conservative as you may have noticed in several years as an accountant.
An unfinished building such as your can be worth somewhat less than the cost put into it, depending on how unfinished it is. You mention several things the house has but the openning line indicates that it is only framed, so it cannot yet have the things you mention. It is only after they are complete that the house has them. The appraisers have to asses what is presently complete. Light fixtures sitting on site in a box can walk off pretty easily.
It sounds like you are going about this in an atypical manner, in that you are goping back to the bank for more money after only having it framed. The projects I have been involved in like this were financed from the beginning with a draw scehdule spelled out up front; x dollars after foundation poured and site leveled out, y dollars after dried in, z dollars after electrical and plumbing roughin, and so on. So the only work the bank had to do after initial approval was to visit site or call subs or look at photos and then issue a check or funds tansfer. Why do you have this unique scenario of running out of money after a quarter of the job is finished?
Excellence is its own reward!
The initial lender made a commitment for the entire amount required, "subject to appraisal". The ground work was done, and the lender encouraged us to get things underway because of the backlog of appraisals at the time (similar to the current situation). The general contractors were hired for the barn and house separately and the schedule was laid down. It came time to start and the lender still did not have the appraisal done, so they encouraged me to start and provided bridge loans to get started. We did! Written contracts. The barn was done in just over two weeks, and they were ready for their payment, the house contractor didn't show up as scheduled. The lender paid the barn contractor, one draw used up, still no appraisal. The house contractor finally showed up in November, with the excavator that I had engaged to do the septic system to do the footers after making a big stink about not using my excavator for the footers while he was here doing the rest of the work. The appraisal finally came through after the footers were in the ground. The conclusion of the appraiser was that the job would be worth 50% of what it was budgeted to cost me, and the loan commitment was cut by 33%. No negotiation. Facing breach of contract, as the alternative we pressed on. I've been through litigation over home building before as a bean counter for developer clients. The lawyers and bankers have almost always been the only winners. Before the block was up, which lasted all winter because of really crappy weather, the general contractor was back for three items that were extras that he had overlooked on the plans before the first board was delivered. Seeing where things were going, we fired the general contractor with the lender's blessing and without the 10% further reduction by self contracting. We got under roof before we used up the remaining loan commitment, but no further. We have been kept on our backs by the lender ever since although we have managed to act like squirrels and keep putting away parts until we have amassed wiring or plumbing or whatever other materials allowed us to push the project a step further. From the street, the place looks done, and the real estate tax assessor did a drive by and jacked the property value to full estimated value (an amount higher than our original budget to completion). We have been able to beat back the county tax assessor, but the war with the lender has continued. Our equity in the project is now over 3:1 based on relatively recent auctions for land parcels over twenty acres in the area, plus the actual out of pocket costs we have incurred, but we are way outside of a residential cookie cutter, and the "farm" lender is the player who is keeping us "clamped down". Their appraiser or the highway is their attitude. So the challenge has been to find the local lender that will portfolio the loan rather than resell it. We have a few lined up, but we are back to the appraiser problem. The first bank's calls to two local appraisers went the same way as the farm lender's "in-house" appraiser. Count walls, not enough rooms, hence the problem that brought me here. Now the trick is to find the right appraiser before I run out of "portfolio" lenders, but I can't afford not to have my ducks lined up in advance.
Man, that's tough! It sounds like you are in a location with falling property values too?
It looks like your only hope is to keep building with credit cards and keep applying to all the other banks in the area. They will probably not make you happy until you have a finished product to base appraisal on tho. The room number is definitely noit a pertinent thing m,ost places but the size and over-garage apartment appearance is working against you on the resale basis. It's probably a combination of several things and not just the room sizes or # of rooms that scares them.
I've been swimming against the current most of my life so I know what it's like. But the final rewards are worth the paddle..
Excellence is its own reward!
O.K., now that we understand what happened,
I've always considered bankers (obviously yours) to be the result of single motherhood (before I get burnt on that line, what is the slang word for such offspring?). In this case, if I were in your shoes, I'd be talking to some of those legal buddies of yours to see if you were given selfserving and compromising advise from that banker. Seeing that that advise has caused you damage.
As a CFP to a CPA, I gotta wonder how you let yourself get in such a position. You know what the world is like out there and if asked by one of your clients, you would have advised against such action like you've taken. But anyhow, you've had enough of getting your nose rubbed in this mess.
I've been in somewhat of a similar situation as you. Although not during construction, but in refinancing. I had a house on a 10 A plot out in the remote suburbs. One of the nicest spreads around. Spent a ton of sweat equity in making it what it was. The only criticism I ever got about it was from appraisers. Just as you've formed your opinions, I could not believe what these arrogant a&&e$ (does that tell you where I'm from?) were telling me. An example, I had a top of the line ground water heat pump system put in 18 months before I sold the place. With utility bills to prove it (showing utility costs of $150/month less than conventional), I felt some form of premium should be placed upon the appraisal for both a new as well as superior performing heating and cooling system. Everybody but one felt that any other house would also have some form of heating and/or cooling system and this was no different. When pressed with the obvious savings of operation, any form of time value or capitalized cost factor was outright rejected. They said they had never seen any other "comparable" being given a premium for the like and they weren't about to start. One had the gall to tell me that he understood completely what I was going through as he was building himself a new home with many of the same upgrades. And then the SOB had the nerve to give me the lowest number of anyone. Even when presented with comparables much closer and comparable than what they used, these sumsabeeches threw them out and used ones not anywhere close. These appraisals can be appealed. But in doing so, it galvanizes their opinions even more. Anyway, we're discussing your problem...
I found the best success with #1, women appraisers (they seem more understanding of a home's conveniences), and #2, as piffin says, somebody that I've got some relationship with.
But getting back to reality. Piffin makes some good points about dealing with these thieves. These people are NOT on this planet to make your life easier or better. They're here to take care of themselves and themselves only. Knowing that, you gotta deal with it.
A coupla of things I noticed from your posts: How's your relationship with the municipality (township, county, whatever)? What's the lead time and requirements for splitting your property? I ask this Q because I've seen people split large lots such as yours into two pieces. One with the house and enough acreage to be like the others in the 'hood. The rest would be vacant farmland. The net property tax on both pieces in this fashion is much less than the one big lot.
What other assets do you have? (none? remember this word: diversifiy.) Recently, the wife and I helped the kid out in moving to a newer house. What we did was put a chunk of securities in a 3 named jtwros account with his social, then had him margin the account instead of pulling a mortgage that he probably could not have qualified for under his teachers salary. The 3.5% he's paying in margin interest (and no closing costs whatsoever) is far less than anywhere else. Even though he makes his payments back into the account (for only about 1/3 of what a mortgage would call for), considering the lower interest coupled with the investment earnings from the portfolio, I calculate his "loan" will be paid off in less than 12 years (vs 30). In that time, the wife and I will need the money back to finance our retirement and the securities get moved back into our 2 named jtwros (or trusts) accounts. It keeps all of these other parasites out of the loop.
Furthermore, I'm sure you understand a CPA's personality. It's a bit different than most in that you're supposed to focus on details. CPA's are NOT salesmen.
You have a major sales job to do. And up to now, that sales job has been quite ineffective. Polish up your presentation. Only make the presentation from the bankers perspective (your's doesn't count in this case). What's in it for him? What opportunities will he see from the deal? How is his risk mitigated? Get your archy to redo the plans so they're more exciting. Include elevations, with landscape details if possible. Get others to support your position. Get some opinions from well known real estate professionals and even your municipality (mayor, township supervisor, etc). Hire an outside, unbiased appraiser on your own and have his/her numbers submitted at the same time as your application. Ask that real estate guy how to polish up your package considering your area. Join the local Optimist or Rotary club to meet more locals that may be able to help.
Whatever you do, get the whole package financed in this round. Don't plan on coming back for a refinancing. One, rates may be higher and price you out of your house, and/or two, you'll have the same damm problems with the next round.
Banks commonly come in two types: Consumer/commercial lending and what's left out of the old savings and loans. The later is where you need to be shopping. Also look to you local credit union. I've found many of them hold their notes rather than selling them. My current home loan is with Nexstar Financial. They too, hold most of their paper.
Hey, I really understand where you're coming from. I feel for you and wish I could help more. But in reality, this deal of yours is one that requires more of your own equity than normal.
All of this talk of appraisers wanting 'comparables' makes me wonder if there isn't a decent market for an independant financer to make some bucks with that 5% of the market that *doesn't* want to keep up with the Jonses.
that's what we've been talking about. Small private banks will carry based on their own judgement instead of national standards. They also charge a half percent or a ful percent above the normal rate for taking on the extra risk..
Excellence is its own reward!
Rich,
Being an appraiser I may be able to offer some helpful advice.
In appraisal theory (and in real life) there is a concept known as functional obsolescence. It can be defined as the DIFFERENCE BETWEEN COST AND VALUE. In homes in the lower or mid price tier buyers will not pay for custom features or expensive finishes. Often times high priced items contribute 50% or less of there cost to the overall value of the home.
I suspect the appraisers you are dealing with lack experience in appraising homes in the upper price tier. Many appraisers are purely trained and unprofessional. They are following appraisal guidelines for appraising tract homes which require comparable sales located within a close proximity of your home and selling within the past year. My experience is that custom or unique homes often require an expanded search in both time and distant in order to find true comparables.
I would recommend you hire your own appraiser. Make sure he or she has experience with custom homes by conducting an extensive interview. Be prepared to pay more than the $250 to $300 a typical appraisal cost due to the extra work involved. Remember, an appraisal is only an opinion of value.
Good Luck. If you need help finding an appraisal in your area you may want to try the Appraisal Institute website at http://www.appraisalinstitute.org
Mike
Thanks for the lead Mike. I have long suspected that I would have to pay more to get someone to do a real appraisal, which is no problem, although so far, the banks have all wanted to work off their own lists of appraisers so getting someone outside the list may be problem but at least I have a place to turn. Thanks again.
I took great interest in your response and probably should have printed off a copy to reference while I responded, but I didn't so I may leave some things out. Probably the most interesting thing to me was the fact that you are a CFP. I too practiced as a CFP for almost fifteen years, through the days of tax shelter syndications and the like. I know a little about selling because for three years in a row in the late '80s I was a top ten securities rep for American General Securities. I have also had the pleasure of being sued as an owner of the firm, over some advice my former partner gave to one of her clients. There is little solice in being one of thirteen defendants in investor litigation and keeping company with product sponsors, syndicators, broker / dealers and other investment advisors. It was also among the first suits brought under the RICO satutes, with no case law to show where interpretation was going to take things. As an SEC Registered Investment Advisor, with full disclosure requirments, many of the money protections under bankruptcy were not available to me without disclosure to my clients and there is an obvious need to not disclose bankruptcy or similar tactics to people that might be coming to you for financial advice. The result is that my wife and I went through over $500,000 of net worth keeping lawyers and bankers from our doorstep and maintain an unblemished record. In the end, I was found guilty of nothing (with the possible exception of being stupid about trying to correct my career as a CFP), but the 4,400 sq. ft house was gone, cash was gone, marketable securities were gone, and my business partnership dissolved.
The current farm is an "S" corporation, (can you say Special Purpose Entity) and the barn has about $250,000 of award winning, Olympic potential horse flesh in it. The nice thing about storing value in a horse, is that lawyers see them as liabilities, not assets. Rebuilding my equities portfolio has been somewhat more problematic, because I have taken a "vulture" mentality and invested primarily in distressed stocks like LTV Steel thinking that the government would not let the 4th largest steel maker in the country go down the tubes (guessed wrong on that one). When you dabble in high risk equities, you are probably going to have more losers than winners and the trick is to pick the winner that will overcompensate for the losers. I stopped practicing as a CFP when I started seeing a string of litigation over Long Term Care insurance where the advisor had the client sign a statement declining the planners recommendation of long term care insurance due to cost, and subsequently needing the care, and suing the planner for malpractice because they hadn't been insistent enough. That coupled with more "weasel" clauses than I would care to recount, from insurance companies, led me to the conclusion that it was time to adjust my career path. I practice on my own now, and having been down the litigation trail, I concluded that rebuilding my assets is too difficult to be inclined to expose them the same way again. I no longer practice as a CFP, but I have found my experience has placed me in demand for financial consulting services around asset protection and even count First Energy Corporation (the fourth largest investor owned utility company in the U.S.) as a client. The downside of asset protection, and strategic structuring is that it is not easy for a banker (who may have no college level training at all) to understand. This seems to make them more reliant on appraisers and other outside experts to assist with their decision making. Add to that the new compliance requirements to maintain FDIC protection and loan structures have changed for the worse.
I have been advised by a community bank that really seemed to like my project (but got scarred off by a couple calls to local appraisers), that I should investigate Credit Unions as having more flexible lending guidelines. That said, the appraisal continues to loom large as an obsticle to my success. As far as getting all the money I need now and not going back to the well again in the future, absolutely. I have no plans to retire at 65, but I would like the option to pick the work I continue to do at that point. I don't want a lender of any kind for a silent "partner" when I get there helping me to make decisions about how hard I have to work.
Thanks for your thoughtful advice.