Well, the appraisal came back but it came back a little lower than we had expected. This is a small bump in the road and I'll try to explain why.
The bank can only give up to 80% of the appraised value of the finished home/project. This total includes land and the home so even though we own the land outright its not like they can take the purchase price of the home and deduct it from the total cost.
So, for easiness lets say the land costs $80,000 and the cost of the build is estimated to be around $500,000 for a total cost to us of $580,000. We would hope the appraisal would come in at $580,000 and then the bank could loan us up to 80% of $580,000 or about a $465,000 loan and that would cover most of the cost of construction and the land would essentially count as our down payment. We'd have to put down about $35,000 to make up the difference of what the bank could loan us ($465K) and what construction would cost ($500K) but we just sold our house so that wouldn't be an issue because we made some money on the sale of our old home.
What essentially happened is that the appraisal came back low and the bank says that it is because there are no other homes that are comparable. The comps they used in the appraisal were all built on more land (2-5 acres) and though they had similar square footage they were built a LONG time ago (1996,1999, and 1987!). Because of this the appraiser had his hands tied and this is really a smaller town/small market issue, I'm sure, because if we lived in a bigger city I would expect to have more comps to use.
What this means for us is this: Suppose the same scenario as above except that the appraisal comes back at $540,000 which means the bank can only loan us 80% of that amount, or about $430,000, instead of the $465,000. So, essentially we'd have to come up with an additional $35,000 - or double what we had initially planned on!
I've been amazed that a difference of $40,000 on an appraisal can change so much of what we are doing. Clearly, this is because we have a higher end home with lots of square footage and there just aren't many good comps in our market. If you are looking into doing something like this check into the market a bit beforehand so you know how much you may need to set aside before you get started. We were blindsided by this but we've talked to friends who have been in similar situations and didn't find out until the end when they were ready to move in and the bank wouldn't cover the extra expense and they had to come up with nearly $90,000 more than they had anticipated so they had to get a second loan, which is NOT something I want to do. Luckily, we found out before we were in that situation.
I've talked with a realtor friend and we have found a few comps that I think may be better. One, for example, was built in 2019 and sold in May of 2020. It is in newer neighborhood like ours and is only about 3 miles away. It is on a 1 acre lot like ours but it has only about half the square footage. I feel like using a comp with only one area where adjustments would have to be made (square footage) would be easier and more accurate than a home that is 20-30 years old with non-comparable finishes, in non-comparable neighborhoods, with non-comparable acreage but comparable square footage. This home would put us exactly where we need to be for the appraisal to be able to move forward now but if the appraiser is unwilling to consider it we'll end up needing to wait a few months to move forward, which is frustrating but the silver lining is that our mortgage would be lower because we'd be putting more down up front.