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Think About the Appraisal

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In the planning stage, calculating the cost of the finished log home is a standard part of everybody’s strategy.  When we built our log home ten years ago, I collected my quotes and put together a budget.  I barely understood how the construction loan was structured, and just assumed that whatever we could afford would be available to us.  And so it proved to be, I suppose (probably because we were in a strong housing market). We got an appraisal as a matter of course and didn’t give it a second thought. But we were lucky; if the same thing happened today, the outcome may have been different. Unfortunately, as we were to learn years later, the house has never appraised for what it cost us to build, and possibly it never will. 

What does this mean in practical terms?  You may be planning to live in your log home the rest of your life, so who cares about resale?  However, I suspect you will want to refinance at least once or twice before the mortgage is paid off. And when you refinance, the bank will order an appraisal so they can be sure they aren’t lending you more money than the house is worth.  If you want a home equity line of credit, the bank will want an appraisal for that, too, which is the only way they know how much they can lend you after subtracting what you still owe them. 

An appraisal is a tricky thing.  You can get two appraisals on the same house at the same time and come up with two different numbers…especially with a log home.  This is because appraisals are very subjective, and each appraiser has a different way of approaching their “subject” property which is often based on the lender’s set of directives. How does it work?  The appraiser picks out a minimum of three properties in the neighborhood that have sold within the past 3 months (or 6 months if you live in a rural area).  Another appraiser may pick totally different houses. Theoretically, the three properties should resemble the “subject” property in type of house, square footage, number of bedrooms, baths, and lot size.  Because they are not exact matches with the subject property, the comparables’ sale prices will be adjusted to make up for what is missing (like a garage) or vice-versa.  The appraised value of your house will vary with the market, and the final number is often dependant on what houses are chosen as comparables. With a log home, most lenders require at least one other log home in the mix.  If there are no recently sold log homes for miles around, the appraiser either has to get permission from the lender to use framed houses, go farther afield, or go farther back in time to find their comparable. This could affect the final price, as well.

All these things begin to matter years after you move into the house.  Our first refinance was a huge awakening, and it didn’t take long to recognize unfortunate decisions we had made during the planning phase that affected the appraisal.  Here are a few examples of decisions that could have a huge impact on future financing:

LOCATION, LOCATION, LOCATION is the mantra of Real Estate.  This does not only apply to having a great view, or easy access to the grocery store.  It can also apply to the relative value of the houses around your building lot.  When searching for your land, check out the sale prices of homes in your township.  If you are planning to build a $500,000 house (including the property), nearby sold prices should be equivalent or higher.  It’s a risky choice if houses are priced considerably lower.  You don’t want to be the most expensive house on the block, and it’s going to be difficult to persuade the bank to lend you money on a house that may not have any comparably priced examples in the neighborhood.  If they can’t find any comparables, chances are pretty good that your house’s value will come in low. If the bank won’t lend you the money to build an expensive house on a lot you have already purchased you may well be stuck, so be sure to do your homework. 

BEDROOMS: Some banks won’t lend on a house that has less than three bedrooms, because they are so difficult to resell.  Bedrooms seem to be one of the biggest determining factors in the value of your house. Even if you don’t plan to use a room as a bedroom, give it a closet anyway so you can call it a bedroom in a pinch; that closet could make as much as $30,000 difference.  No closet, no bedroom; it’s as simple as that.  And remember that the septic system is designed for the number of bedrooms in the house (NOT bathrooms), so you cannot declare more bedrooms than the septic system can support.  Also, if you plan to put a bedroom into the basement, it must have an egress window in case of fire.  The same applies to bedrooms on an upper floor.  Make sure the window is big enough to climb out of.

SAVE THE GARAGE FOR LATER?  MAYBE NOT: It can be tempting to spend the money on upgrades in the house and save the garage for later. That is what we did, planning to build our garage in five years and relying on the equity our house was naturally supposed to acquire. Oops… we did not plan on a declining market.  To get a home equity loan and build the garage to improve the value of the house, the house needed to appraise first.  In the current market, we couldn’t get a good appraisal without a garage.  What happened?  Nothing.  No equity, no money for a garage.

BASEMENT vs. CRAWL SPACE.  Whenever possible, the basement wins the argument hands down.  Most houses have basements, and if you build with a crawl space you will suffer the consequences on the appraisal end.  You cannot finish a crawl space and increase the value of your home.  If there are obvious disadvantages to building a basement (blasting, for example), you would be well served to figure out if there is any possible way to make a basement work. For instance, you could raise up your house and bring in 200 truckloads of soil like my next-door neighbor did.  Because his excavator was very skilled, he has a gentle slope in the front yard, and you can’t tell that his house was raised.  The up-front cost has been more than offset by the increased value of his house down the line.  We built a crawl space to our eternal regret.  Not only is the house worth less because of it, but the inconvenience is much more than we bargained for (try putting in a 4 ½ foot water treatment system into a 4 foot crawl space, for example). Initially, we thought it wouldn’t make much of a difference, but we were absolutely mistaken. 

UPGRADES: It is a mistake to assume that because you have a hand-crafted home, buy expensive materials and do lots of upgrades, that your house will appraise for more money. If you want a $100,000 kitchen that is just fine, but be sure you are building it for yourself because it won’t make your house worth particularly more than your neighbor’s house. Your expensive hardwood floor is not going to be valued higher than a comparable’s carpeting.  A custom staircase is only a regular staircase in an appraiser’s eye.  The same principal applies for every upgrade down the line.  In the end, those gorgeous improvements will make your house much more saleable, but they probably won’t increase the dollar value of your property (unless you get lucky).  They have a name for this: overbuilding. Do the upgrades for your own enjoyment, but don’t think you will recoup them on the resale end.

Bottom line?  Although you must build your house to suit your lifestyle, there are certain “givens” the bank is looking for.  No matter how many upgrades on the inside of  your expensive log home, if you dispense with the basics (garage, basement, bedrooms, central air) you may well forfeit value in the long run..  It doesn’t seem fair, but if you start the process understanding your trade-offs, then at least you can make an informed decision.

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