Low Appraisal Stops Financing - what to do?

12 Replies

So I've got a residential construction project that was supposed to kick off this year. I own the land free and clear (200k value), constructions costs are $815k.  I planned to use the land as the 20% down payment. I had my bank financing lined up and approved, but the appraisal came in low at $850k. Which I disagree with. But now the bank is saying they will only loan 80% of that appraised value, which leaves me short $130k. 

I looked into getting a hard money loan in a second position for the down payment, but they wanted 5 points and 14% interest which is just too expensive. This isn't a flip so there's risk I could get stuck with that high interest. 

Any suggestions? Should I just apply at another bank and hope for a better appraised value? Any other creative financing ideas I could use? I've got the CF to support the debt, just not the capital. There seems to be very little appetite for private loans in second position. 

I'm not entirely clear on a few issues.  Is this for one residence or several homes?  If this is for one single residence, the appraiser is reporting a value based on your post of $850k subject to completion.  Your assertion is that the as completed value should be higher.  Why?  How does your opinion of value differ from the appraiser in terms of actual market data?

If this is for several homes, the appraisal report should contain at least three reported values 1) "as is" - which presumably is the land value, 2) "as completed" - which reflects the point at which construction is completed but may not all be sold yet and 3) "as stabilized or upon sell out" - this reflects the retail value of all the homes to be sold.  The lender/bank utilizes these values in not only determining the loan size but how much and when to fund the construction draws.

@Stewart Wyne hard money lenders often want to be in a first lien position (which the bank will already have). Private equity might be your best bet on this, but be prepared to show your investors that appraisal and discuss it with them as part of your disclosures.

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I assume you're trying to get construction financing and the bank's appraisal is for the land plus completed improvements.  I'd take this as a big red flag that you're on the verge of putting $1.015 million into a project that will only be worth $850K.

More Details. This is for a SFR. Yes the appraisal is as completed value, land + improvements.

My issue with the appraisal is the per SF value. If I compare the appraisal to other custom homes in the area, it's 25% lower per SF. I also have a superior location. 

Has anyone had any luck disputing the banks appraised value? 

@john holdman - From a re-sale value you may be right. But in the long run, this is really a cash flow play for me. There's definitely a lot of risk though. I recognize that. Thanks for the info though.

@Stewart Wyne well a big question here is per square foot value an accurate measure of value in your market? I dont know Atlanta what so ever....but in the DC area per square has no impact on a properties value, while in Massachusetts where I also do business it does. 

I recently had success by disputing an appraisal.  The appraiser would not change it so the lender ordered a 2nd appraisal.  Now this was a situation where the 1st appraisal was incompetently low, which the lender recognized.  Sale price was $130, 1st appraisal came in at $80, 2nd appraisal came in at $140.  No doubt the last appraisal that first guy did for that lender.

well reality is a second behind a construction loan is about as risky a loan one can make and 5 points and 14% frankly is a smokin deal if you got someone that would do that for you.. 

other options

1. Friends and Family 

2. equity partner but it does not seem like you wnat one of those and it would be far more expensive than the short term loan you have already line up.

3. cross collateral.. with some of your other assets.

4. advance on your retirement accounts if you have that ability.

5. sell your securities.

6. have some subs help you on this and pay them a bonus when you refi.. ( although again your smokin deal on the second loan is probably the cheapest).

@Stewart Wyne Order your own independent appraisal. That way you get another unbiased opinion and can then have the conversation with the lender if there is a difference in the two appraisals worth discussing.

Alternatively look for another lender.

My issue with the appraisal is the per SF value. If I compare the appraisal to other custom homes in the area, it's 25% lower per SF. I also have a superior location. 

Is the proposed house bigger than the comps?  If so, your $/sq.ft. will be lower than the comps.  When an appraiser makes an adjustment for size differences, they do not use 100% of the average $/sq.ft.  Rather, they will use only a percentage, often less than 50%.

You also have to be careful comparing floors.  Upper floor footage is worth only half or so of ground floor.  Basement maybe 10%.

In general, $/sq.ft. is not a great metric.

Look, at this point, you haven't invested the money.  Listen to what they're telling you.  You're letting your biases give you a higher value than the lender.  Make adjustments to your plan to make it work with this lender.   You'll improve your chances of making money on the deal.

@Jon Holdman You are totally correct. I have an emotional connection to this project, which is making me bias. I need to keep that in mind. 

Will you be living in this house? Why are your construction costs so high? It must be a huge house. I have always had issues with appraisals in my area, because there is a significant premium that buyers will pay for a completely renovated or new construction home, given the correct location and several important factors. Appraisers often gloss over this. HELOCs are nearly impossible. I had a new residential construction project that appraised at 350K at first, we contested it, then we got it up to 440K. And we sold it for 585K—it then appraised at the 585, with help from our real estate agent.

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