By: Ron & Lisa Gibson
“We need to get an appraisal” are the words that start what can end up as a frustrating aspect of a log home journey. We’ve had a few calls recently from people who need help finding an appraiser for several different reasons. I am not an appraiser, so I thought I would do some research to see what is helpful to know before setting out on the appraisal part of your log home adventure.
Most lenders require what they call “comps” (short for comparables) in order to have a realistic value of your home’s worth in case they end up owning the home from a defaulted loan. A comp is a home that is similar in materials, workmanship, and size that has sold, typically within the last 12 months. Comps are based on the resale value of a similar home, so if there have been no log home sales in your area within that time frame, your appraiser may have a problem getting an accurate number for the bank. The majority of log home owners do not build to sell – they plan on living out the rest of their days in their dream home and it takes unusual circumstances for them to consider selling. If there are no log homes that have sold in an allowable time frame, the appraiser is forced to make a judgment call on what would constitute a comparable custom home. Based on what they find, this can help or hurt your plans for financing.
To start off, it is immensely helpful to work with a financer that knows log home construction, also known as system built homes in the banking industry. Since the economic downturn of 2008, a lot of the specialized log home lenders have gone under, so this may be difficult. If you already have a solid long term relationship with a bank, that is the best place to start since they already see you as a valuable customer. When you are screening banks, ask about their criteria for an appraisal. Some key questions to ask are, are they willing to allow adjustments for geographical area to allow a wider range in which to find comps? Will they allow a longer look back period for the history of sales? What do they consider a comparable home if there are not enough log homes sold in the area? Since the bank is the one who actually hires the appraiser, ask them if they have contacts with those who have experience with log homes and/or unusual circumstances. You definitely don’t want to end up with an appraiser that thinks “a log home is just like any other log home”, but understands the different styles, methods, and even some of the different manufacturers, since they affect the final value. Even if you have to pay for one to travel, it may be worth the expense if it gives you more favorable lending terms in the long run. An experienced appraiser will be familiar with working with the banks for these special homes, and will have better judgment for any needed adjustments. Don’t hesitate to take the initiative to call other lenders for referrals to that kind of appraiser, as well as local and regional listings. Log home companies in your state or neighboring states may have good contacts as well.
A quick note about cost versus value: the cost of the home is what it will cost you in dollars to own. The value of the home is the number the bank is interested in getting from the appraiser and is determined solely by current market conditions – what someone is willing to pay for the home. The cost is determined not only by cost of materials and labor, but also by many of the decisions you make as the home owner. Decisions such as, are you going to do any work yourself? What kind of materials do you want to use? Size of the home and, are you planning to add unusual or extra amenities? If you are relying heavily on financing your log home, then you may need the cost to come as close as possible to the value, preferably lower. If you have extra cash stored up for your dream project, then you have more leeway for a difference between the two numbers. There are many articles here on loghomelinks.com as well as elsewhere, to help a home owner cut down on the costs of acquiring a log home.
If you are, like most log home buyers, looking for a construction loan to have your log home built, the appraisal process has a few more steps than a traditional home buyer’s appraisal. The appraiser will do a “subject to completion” appraisal of the land and building site, along with the blueprints and builder/dealer’s cost sheets to figure a home’s value that is “per plans and specifications”. This may require you to have extra detail in those documents in order to give the appraiser an accurate idea of the finished home. Most lenders will require inspections periodically throughout construction as well, to make sure the home is constructed as planned. There will always be a final inspection of the home after construction is complete to get the final appraisedl value for the permanent home loan. The lenders will charge for each appraisal/inspection done during construction, so you may want to try to combine steps that are inspected to save on those costs if possible.
Shopping around for deals on kit homes is one way to get you a home that will appraise higher than what you had to put into it. Even in the current economy, we are seeing fantastic specials run by log home companies on some of their kit options. If you are able to add in some sweat equity and can shop around for sales on the components that are not included, then you can come out quite ahead in the appraisal game. If you have the time to give, are not hesitant to jump into assembling your own kit home, and have reliable help, it can be a relatively easy way to add some equity without too much difficulty. Many kit home dealers have an easy and helpful support system in place to assist this type of home buyer. From the appraisal angle, if you purchase a kit home that is the same or similar enough to one that was sold in your area, it will make the appraiser’s task that much easier for finding comparables.
If you are on the fence about building your own or buying one previously built, you may want to take a serious look at existing log homes on the market in your desired area to see if you can have your log home dream for less than what it would cost to build from scratch. Current housing market conditions will affect the appraisal values in this scenario just as it will if you build your own, so it pays to do the homework specific to your area.
There can be home design considerations that will make your appraisal more difficult. For example, some areas may require an appraisal to be based solely on above ground living space. Let’s say you are planning on building a home with one bedroom and bath on the main floor with 1000 square feet of living space, and a lower finished basement that is also 1000 sq.ft. with another bedroom and bath. The appraiser may be forced to find comps with only 1000 sq. ft or so of living space and only one bedroom and one bath – the above ground comparable size of your home. There may not be many custom homes in the country, let alone in any given area, that will fit that description. Learn from your appraiser if that is a consideration, and don’t be afraid to adjust your plans if needed.
While a great idea, alternative energy is not widespread enough in most regions of the country to be an easy-to-appraise addition to a home. If your plans include features such as multiple roof lines at many angles, swimming pools, tennis courts, and other amenities, and oddly sized or shaped rooms, they can make finding a comparable home next to impossible. Consider if these things are really essential to your dream and worth the extra cash up front you may need to have. It pays to do your homework and plan accordingly where you can. Some of these things can be added after you are settled in your home and know for certain that you have the extra money to add them.
While this is by no means a comprehensive guide to log home appraisals, I hope you will have enough information to help you know what you need to learn, specific to your situation and location. When you consider the fact that the appraisal is so key to your home’s completion or purchase, and can affect your long term financial stability, it really pays to do some focused research ahead of time. It’s an important part of the whole process that can smooth the way for successful log home living.
by Ron & Lisa Gibson