I’m about ready, next few weeks, to apply for a construction loan to build that new house I’ve posted about here previously.
So, talking to my builder and 2 banks last week here’s the biggest problem: The appraisal might come in too low for me to borrow enough to build. Because appraisers are under pressure to value things low, and they have the comps to justify that being that house prices have fallen. And no lender will let me lock in a rate on the permanent financing–a minor issue at this point.
Yeah, as a couple we’re financially practically the perfect borrower. And we own the land; own our current home and don’t need to involve it in the deal; have cash to put in.
Building in an area of highly variable prices (being redeveloped rather randomly). The whole deal turns on the appraisal in this market. One bank says a third party who supplies appraisers has to pick the appraiser, but we have a right to meet with the appraiser, with our builder, during the process. Builder has done that a couple of times the last year to “educate” the appraiser as to the value in what we’re building (better than average materials, systems, etc).
Anybody done this? Have any advice? One advantage is we can get a good rate on the construction loan these days. IF we can borrow enough. Can only shake the piggy jar for cash only so far.
Replies
Around here, most custom homes probably would not appraise for land costs plus construction costs. You would have to bring a fair amount of your own money to augment a construction loan, if you could get one at all....
Exactly. Lender considers it as one thing, which they get to sell if I should default. Two years ago, when we started out, the whole deal they were all offering me was amazing. Now it's meager. I'm throwing in the land for free, as it were. And about 33% of the construction cost. (Oh, and all the architect fees and other costs I've incurred to get this far--I'm not trying to get reimbursement on that either).Still I'm sweating the appraisal. Of course, this is ridiculous, as I can help give people work, buy materials, etc. Just what the economy, and building needs right now. So, if people haven't realized the implications of our current housing situation on people like me--I'm the poster boy.
Edited 10/13/2008 12:23 pm ET by MtnBoy
If you own the other house free and clear I would use the equity from that first, and only finance the actual construction if you absolutely have to. I would think that a lender would be willing to give you a first mortgage on an existing home much more readily than they would an owner/builder construction loan. Hopefully you are dealing with a small local bank for any borrowing, rather than a larger outfit that does not know your specific market as well.
Once I thought about it I realized I could only get about 25% of the mortgage amount I need out the the existing house (it's basically a dump in a gang-infested neighborhood. Living here's how I saved up the $ I have)And a home equity loan on the existing house would make it harder to get the new construction loan. So, I'm kinda boxed in here.Don't have the time or skills to build me on using the credit card system mentioned. So, I gotta hope the appraiser comes through.
If you're bringing the land and 33% cash, and you can get another 25% using the equity in the existing house, you should be able to swing this if you find a local loan officer who can see the situation. The biggest piece at this point might be a VERY detailed and realistic budget that you bring to the loan officer. From what I know they are fairly nervous dealing with o/b folks on construction loans, because of unrealistic/unknown budgets and unknown timeframes (not that a lot of contractors are better on either one!)
I wasn't clear. I'm bring 33% of the construction cost. I need to borrow the remaining 66%. Of THAT 66% the home equity loan I could get out of my current house would be only 25%. So, 25% of the 66%. Not of the total. I still need a loan. I have a builder. I'm not an owner builder. The other service a bank provides is to reduce the risk with a builder. They administer the funds and that's a backup for me.
Understood. I think you're going to find a way to make it work.
I understand your reluctance to get involved with Credit card financing.. it does seem scary.
It's not hard.. you can go on line and find all the credit card offers and read the small print etc.. Up to this point you haven't committed a bit, even if you apply for all those cards you still really haven't committed.. Only once you use one of the checks they send are you committed.. Once you make your selection it's pretty safe assuming you hold up your end of the bargin which is make payments on time..
Now you will make those payments from credit cards, not from your own cash so you always need a few untapped cards as back up..
IN addition if you are as much of a luddite as I am and insist on mailing in checks mail them about 20 days before they are due and mail them certified post.. (that way the banks can't sit on your check and claim it was delayed in the mail).. Electronic funds transfer avoids that.
In roughly 7 years I never paid a cent of interest except the last one. So in all reality they got about $700 worth of interest for a 7 year period & well over $100,000 worth of credit card money..
And a G.C. is going to sign a contract with me given that financing plan?
I can't see why not? You don't need a pile of gold for him to get started do you? Don't you have some sort of draw set up? Payment upon completetion sort of deal?
It's your job to provide funds as needed not to prove to him that you can.
I mean first you said you had some cash saved.. you can come in with several checks to put you well past midpoint.
If you should fail to provide cash as needed work stops..
While in the past some contractors wanted absolute committments. Todays building market is differant. Hungry is the operative word..
By the way have you renegotiated with your contractor lately?
Prices quoted as little as 2 years ago have come down dramatically..
Well, I might be able to do it that way. I'm thinking of possible problems: Bldr feels more secure with bank than me and my shifting credit card scheme. But with enough legal stuff on paper (more $ needed for lawyer's fees) and money deposited by me in an escrow account for his draws (& hire a 3rd party--who? lawyer? more $) to manage that escrow acct., it might be doable.Don't even have a contract yet. Prices here have gone nowhere but up, except on lumber. Everybody's getting a "fuel surcharge" tacked on for materials delivery. Subs are facing highest gasoline prices in country last I heard (shortages here ostensibly thanks to Hurr. Ike disrupting supply, but there's a lot of visitors still here in shelters provided for Ike victims and they're creating more demand than usual here, too).We're negotiating the bid. I still have to get him some specs so he can put them out to bid. A biggie is the electrical plan, which my draftsman hasn't completed yet. Most of our cheap labor has left the state--or country. Prices aren't down--yet. If they're coming down.
Work with a bank for the draws, preferably one you'd like to get a mortage with.. nothing calms a bankers cold heart better than steady cash flows..
You don't need that much legal.. define what you want done and when you're ready to pay it make it workable for him while it protects you and sit down with an attorney and hhave him draw up the contract..
If you do 98% of the work schedules etc, in cordination with the contractor explaining that you will have a lawyer draw up the final verbage you should be well protected..
Most contractors are decent and if you've picked a crook all the legal verbage won't protect you one bit! All it really does is control expectations..
Whatever you do watch the 1949 movie Mr. Blandings Builds His Dream House with Cary Grant and Myrna Loy
Accept that the whole premise of the movie is what building is really all about! It may be 1949 but it might as well be aimed right at your situation!
but please make note of what Their lawyer says at the end of the movie.
Have no idea what you're talking about. The bank administers an escrow account, so they collect a fee I guess like a trustee does, but I fund the account? What name do I give this and let me check it out some before I approach a bank looking like a fool.And one other thing. Our FICOs are 790 and 805, so we're still getting unasked-for increases in our credit limits on our cards. But I don't remember when we saw any of those low rate offers. Isn't that a thing of the past now too?
Edited 10/14/2008 3:59 pm ET by MtnBoy
Oh I am sorry, I should have been more clear. You'll never get those offers from existing accounts.. Only by switching to new accounts.. with credit scores like that you should have plenty.
What you need to do is change the bank you do credit with. You may still wind up with Master card or Visa but a differant bank(s)..
Actually no with regard to paying a fee to.. It can be a simple checking account which requires two signatures to to access. (yours and your contractors)..
I have to think about this seriously. Off the top of my head it sounds too iffy all around. Although, as a Plan B, it has definite merit. Could become Plan A anytime now when we see what happens now that we're all gonna be equity holders in a bunch of banks. Too bad they didn't give us (me) voting rights too.
Do take your time.. non-standard financing plans require ability to think non-linerarly and if you can't comfortably explain it to yourself and don't clearly understand everything involved you'll always be worried and frankly that's not worth it!
However please do watch the movie I suggested.. (Mr. Blandings builds his dream home with Cary Grant and Myrna Loy 1949 Most good video stores will likely have a copy of it.. or you can buy a copy from Turner Classic Movies.
More so than anything I've read or heard about it applies to what you will be going through..
I'd heard of that movie before, but was afraid to watch it. I'm not at the age when I want to stress my heart unnecessarily. But, on your advice, I will watch it. Also heard it was kinda funny.
Yes it is not only funny, but well done.. I believe it's rated as 4 stars out of a possible 5
You will stress your face with smiles and grins (when has Cary Grant ever made a bad movie? )
I built mine without a construction loan..
What I did was get a whole flock of credit cards offering interest free deals and used that money to pay bills and provide me with the cash needed.. Then as the term of the credit card's interest free period expired I paid it off using more credit cards offers..
When my house was well underway I went to the bank and got one final home equity loan and had the house appraised.
Only once did I get nailed for any interest at all and it was still massively cheaper than a construction loan.. plus I didn't need to show bids or blueprints or anything (never got any)
Thus my sweat equity was fully credited and the final appraisel was roughly 6 times what I actually needed to pay off credit cards completely..
Used to be able to talk directly to the appraiser for jobs such as yours, but now they've closed the door on that, and we no longer know who the appraisers is let alone speak with them. The most recent comps are unfortunately dictating the appraised values, most of which could not be duplicated with new construction-huge problem.
I'd suggest that you shop carefully for other lenders.
You might think of it as though you are looking for the perfect classic car. There may be a number of them out there for sale, but you only want exactly what you want so you hold out until you find THE ONE.
Shop for your loan the same way. I'll bet you can find it if you look hard enough.
In our local market you could get the loan you want from the local bank. Yes, even now.
We have three relatively "local" banks here (four, counting the credit union) and each will do things the others won't do.
which bank are you using?
talking to several. Not sure I'd want to say. Small one near the property doesn't have a very good deal in any sense. One sense being that who administers the construction loan is quite variable and sometimes handled outside the bank. There's a nagging obstacle to deal with during a build. I run all candidates by the builder to see if he's had any problems with them.The big one I've talked to all along says it's business as usual with them. All the loans they originate are administered by them and remain in their portfolio. And they have a much better rate, as of this date (things are fluid, aren't they?) Surprised the heck out of me.
Keep in mind that "better than average materials" add very little or nothing to an appraisal. It's mostly based on square footage. If your appraisal does come in low, maybe you could drop some of the interior stuff to be dealt with later. Like put in a cheaper kitchen, and upgrade when ya can. Or maybe even cut down the size of your house a bit. Stuff like that is done all the time.
Two rules for success: #1. Never tell all you know.
Correct you are about the materials. Yet, my builder was able to get an appraisal changed once he spent a day "educating" the appraiser about steel and concrete construction in residential and about modern architecture in general. That was early this year. Now it may be different. I've already downsized and downgraded all I want to. Using most of my old appliances in the new kitchen. That's not where the money is. It's behind the walls, under the floor, and in systems and in brick for siding. It's more at the point of can we get our hands on the appraiser and what does he need to be told.If I can't get enough money anywhere, I'm more likely to delay it till housing prices (and therefore, appraisals) come back up some. Meanwhile, I'll save up some more cash. Thus contributing to our current problem rather than being part of the solution....
don't need to involve it in the deal; have cash to put in.
Then why get a loan at all??
Like Frenchy, built own on a pay-as-you-go basis, no contruction loan at all, no insurance on the building either till me moved in, but 'tree-hugger' arsonists not a problem then like it is now in some areas. Althugh now in PNW, think most have been caught?
The credit card (0% balance transfer deals) scheme mentioned above DOES work and work well it does. Let me elaborate.Hopefully, you still have an open HELOC on your existing house, or some other line of credit you can tap. Say that HELOC credit limit is $100,000. Use your awesome credit rating to apply for 40-50 credit cards in one day (all at the exact same time), make sure all of the cards you apply for offer 0% balance transfers with zero to low capped fees (many have fees up to $90). Now, you'll get approved for 20 or so cards and rejected for the rest, and your credit report will take a huge hit. Who cares? You now have let's say 20 credit cards with a total available balance of $100,000. Now, write yourself a check from from your HELOC for $100,000 and put that cash in the bank. There's your construction money. Then, pay off your HELOC with your new (0%) credit cards using Balance Transfer.As you go along, make sure you have enough cash in the bank to cover your monthly minimums for all of your 20 new credit cards and just set your online banking up to auto-pay all of the cards out of your constuction checking account.In 11-12 months, when your 0% BT offers are getting ready to end, do the exact same thing, but this time, use your wife's SSN and Credit Report and then use her brand new cards to pay off the balances on your (now expiring) credit cards. 12 months after that, since all of those card accounts you first applied for are now 3 years old and carry zero balance, your credit report will be stellar and you can start the whole scheme again, but this time, you'll probably qualify for $200,000 or more.Then, after the construction is complete, go shop around for a good appraisal and a brand new first mortgage.Search google for "App-o-rama" or "Credit Card Arbitrage", and you'll see that lots of people make good money doing this. I know I do.Using your 0% cash advance for new construction is one of the best ways of "making money", because you save yourself the construction loan interest (what's that, 8%? 10% 15% now?) and, since there are no interest gains (versus what I do which is put the 0% money in savings accounts), there is no income tax.When the wifey and I get around to building our house in 2-3 years, this is exactly how we will finance the new construction.
My wife and I are in a similar situation. We are downsizing and owe nothing. We were going to borrow the money to build the new home using the existing home for collateral. Then we would move into the new home and sell the existing home. With the economy like it is we now plan to sell the home we are in and then build. I have a shop building on the land where we intend to build that we could probably live in while building or we could buy a used travel trailer for temporary home and sell it when the house is complete.
So, do you need a mortgage also?
Its one of the sermons I do.
Youre not going to beat the bank . Its a set up deal.
The bank will "only" use three app. They of course know this and they are on rotation. They get all the banks work. The customer pays them but the bank orders it . You are a one time deal. One and done . They bank calls them every week for work. The choice is clear . Turn in low apps if you want to work for that bank or else get moved off the list. Its quite simple . You cant win what should be a fair fight .
Sounds like you are wanting it tilted in your favor though and thats not going to happen. You said the prices are down and answered yourself . Custom homes as david said , dont come in under. They are normally always over .
You want a deal, but a repo someone else has lost their butt on. No you want what you want . You arent getting this though with the banks money. Not today.
Is this still true in light of the new regulations that went into effect, in Jan 08, I think, prohibiting banks from selecting their own appraisers?
I just had a bank do it last week .
Other than that I dont know .
And why would a bank NOT want to make a loan to such a stellar candidate as myself? Don't they like making money anymore? Or do they just plan to hoard all that fed. govt. cash?And if so, do people like me have to settle for buying existing housing stock? And no one builds new houses again except for the truly rich who believe in paying cash for their houses. Where does that leave this industry? And where does it leave banks? The bankers I know say banks live to make mortgages--not to rake in deposits.
Their in it to make a living non risk style.
LMAO--no, wait. I think I still feel pain there and they're causing it
I just talked to my banker. As a matter of fact 5 minutes ago so I asked.
The customer or the bank doesnt deal with the appraiser anymore .
That seems to make more sense. I just got the wrong info last week from a local branch of one of those megabanks. They don't originate construction loans, anyway. I have to deal with someone in a diff. dept. centrally located. Locals just do standard mortg. loans. So my local thinks the customer can still follow the appraiser around the suspect property.So my builder can't help me out with this. No wonder he's been pushing me to pull the reins in on costs. Not sure that he knows about the change either, though.Hoping for all that taxpayer dough to trickle on down here shortly. Given the time it takes for everybody to get their part done, I'm possibly a few months away from a signed contract. Maybe I'll hit that sweet spot when the $ has trickled down and before the interest rates rise. This is really dysfunctional all around.
So who orders the appraisal? The appraisal fairy?
As a banker, I think the new regulations that were discussed previously separate the lender (not the bank) from the appraisal process. We use an appraisal coordinator (an employee of the bank) to order the appraisal and communicate with the appraiser. The lender is not supposed to lead the appraiser re; value.
Tracy
If I had read your post I would have asked .
She said it was a company that over saw it .
On a construction loan or a ballon note she would be the lender.
I normally borrow from the bank on a flip or a rental which is a business loan.
I set up a line of credit today so I could make cash offers. That took full security. I had to have two appraisels on two properties and they were done by separate people . Thats really how the question came up. She explained it . Separate property came up on rotation. She said they couldnt do it anymore but she IS the lender in my case .
Tim
One problem is that a lender doesn't want to have the house ... but not the property. One way that issue is dealt with is for the land to be sold to the developer, the house to be built, and for the mortgage to apply to the entire package. Naturally, this sort of arrangement is best handled by lawyers who have done it before.
Otherwise, the word IF is the biggest word in the language; IF the Queen had balls, she'd be King! Don't let wishful thinking cause you to waste your time with such a solid 'no.'
As for appraisals ... well, I think we're going to see some changes in that business ... after all the self-deluding hocus-pocus that happened during the property bubble.
Some builders have the means to fianance. Others have creative ways to reduce their costs, perhaps by your doing some of the work yourself.
Of course, it's also possible that the builder is charging you way to much ... a detail the banks are hinting at with their denial of the loan.
Haven't been denied yet; haven't applied yet. For 2 years now I've been having information-gathering discussions with a variety of bankers.All the banks roll the land into the loan. You just have to live with that.I am alert to the notion that my builder will charge me all he can get away with. But he knows I'm not rich and that I want a lot in the house that'll be expensive stuff. And he's experienced the reality of appraisals coming in much lower than they did when, as a CNBC anchor said today: "We were helicoptering into parties in the Hamptons and thought it'd never end." Who ARE these people???So, I'm watching everybody's hands in this game.