Planning to Build a House?

If you are planning to build a house there is one big factor to consider.  I had a client call me recently because the lender who previously approved their new build wanted to do an appraisal. They were not aware this was a requirement until after the appraisal was done.  That by it self is not the issue.  However, these clients committed to purchasing this house back in 2014 when house prices were a little stronger.  Almost a year later the appraisal gets done and it suggests a value more than $50,000 less than the purchase price. 

Problem with this appraised value is back when the clients agreed to purchase this home they committed to the purchase price at that time and waived their condition of financing.  Nobody can predict the future when it comes to values of homes.  With a reduced value of the home, the lender is now forced to lend on the appraised value, not the purchase price which means the clients have to cover the $50,000 shortfall plus their down payment.  If you do not have the extra money available, you stand to lose your deposit which could mean a loss of 5% to 10% possibly more depending on what you agreed to give the builder when you signed the original purchase agreement.  You will not get this money back if you cannot obtain your financing to purchase the property. 

Some builders are now offering price protection guarantees to ensure something like this doesn’t happen.  In my opinion with the current state of the real estate market I would not recommend anybody build unless you have a large amount of savings or the availability of a large some of money to cover any shortfall which might come up.  If you are going in with the 5% minimum down payment requirement you may end up losing it.  You never know what can happen in the time it takes to build your house.  This process can take up to a year and sometimes longer.  A lot can happen in this time. 

Not only do you need to consider possible property values but you need to consider what the interest rate environment might look like when your house is complete.  Higher rates might lead to your not qualifying for that purchase anymore. 

If you are considering this, I would strongly suggest you speak to a mortgage professional first (Like Myself) to ensure you are fully aware of all that is involved before you commit to anything.