The Articles section of our website is devoted to answering frequently asked questions, educating homeowners on various aspects of designing and building, and also sharing our experiences. One of the saddest scenarios we have encountered is homeowners losing everything in a fire and not having enough insurance to rebuild with something even remotely close to what they lost. This cartoon a friend sent us sums up a variety of perspectives that we would like to explore.
Home Value – Your Perspective
Home value to the owner includes both an intrinsic value – what is it worth if you sell it or borrow against it, and emotional value – personal work you have done from landscaping to weekend projects and the value of fond memories. We have found that when people have saved for years to build a certain type of home, such as a log home in Montana or a beach home in Florida, that home may even be added to the will as an asset that is to be retained by the family. When neighborhoods decline or the area changes by a highway being built nearby, some of the personal value derived from fond memories can diminish. It is important to remember to be aware of what your home is worth in the local market and sometimes selling and building somewhere else is the best way to protect both your intrinsic value and your emotional one.
Home Value – Your Buyer
This leads us to the value of your home as seen through the lens of your buyer. Things that make a buyer bulk are items that detract from the structural stability of the home and also those that take away from the overall curb appeal. To gain the best resale value structural issues like a cracked foundation, worn roof, or damaged siding should be repaired before the house is listed for sale. Cosmetic issues are often easier to solve than structural ones. Simple things like repainting rooms and cleaning up landscaping can go a long way to making a good first impression and improving the resale value.
Home Value – Your Lender
Home loans are often based on about 80% of the home value. The bank automatically builds a 20% equity into the mortgages. If more money is needed to purchase the home, sometimes a second loan for a higher rate or a personal loan is required. The lender is strictly looking at comparables of recently sold homes in the surrounding area. Lending and home appraisals go hand in hand. We have seen loans on remote properties get held up for as many as six months because there were few comparables. Remember, the lender cannot compare your property to homes that are just listed for sale. When there is not much data available for recently sold properties, calculating value by the appraiser can be very difficult. Sometimes a lender appraisers a home for more than the owner realized it is worth, but more often it seems the value is lower. One way to help improve lending value is having the property as prepared as possible before an appraiser walks through the house.
If you are planning to use a construction loan to build your home, it is very important to wait to make any improvements on the site before you get a loan in place. If, for instance, the foundation is installed before a loan is secured, it opens the door for the lender to question exactly what has been paid for up to this point and what has not. In the past 25+ years of our general contracting experience, we have only seen one homeowner successfully obtain a loan on a project after construction started. Usually, a construction loan is secured before construction begins or after the home is 100% complete. When applying for a construction loan it is essential to have a complete set of custom home designs on hand to provide to the lender. Blueprints are also vital for obtaining building permits and gaining HOA approval.
Home Value – Your Appraiser
As the cartoon suggests, you may feel the appraiser (as compared to the lender) has an even lower opinion of what the home is worth. It is important to remember which approach someone is taking to view a property’s value. A buyer is probably brought into the picture by a realtor. The realtor usually tries to maximize the sale and get the highest price possible in the prevailing market conditions. But the lender and the appraiser are looking at your home from the perspective of establishing a mortgage so an underwriter can make a tidy profit in interest with a lower risk (such as lending on 80% or less of the appraised value).
For a new custom home, the appraiser bases part of their value projects on the completed construction drawings. Most lenders today will not loan based on a ‘napkin sketch’ or hand-drawn diagrams by an owner or builder. Most commonly an appraiser needs construction drawings that include elevations, floor plans, perspective drawings, plot plan, and material details. Occasionally, hard copies of the blueprints are required by the appraiser, but more commonly a PDF file of the documents is submitted electronically.
Home Value – Your Tax Assessor
Looking from the tax assessor’s point of view is yet another way of valuing a property. Across Montana, we have seen property taxes rising dramatically in the last few years. Gallatin County has experienced some of the most substantial tax increases because the property values have skyrocketed.
Home Value – Your Insurance Adjuster
And finally, the insurance adjuster and the way they look at the value of your home should be considered. As I mentioned above, one of the saddest phone calls we get is from homeowners who have lost everything to a fire. In the past 25 years, we have only seen one homeowner who was insured for enough to rebuild what they lost. Most of the time owners discover that their insurance will only cover about half of the total rebuilding cost.
One homeowner we built a custom home for several years ago would call us each year and ask for current building costs and what we recommended they insure their house for in case of a fire.
The desire to economize on insurance premium payments is understandable, but when a wildfire rolls through devouring everything in its path suddenly lower insurance premiums become the last thing you contemplate. Be sure that whatever insurance amounts you are paying for will provide you with the home you will be satisfied with if disaster claims the original home. Paying a higher premium with better coverage is an investment in the future.
Overall, homeownership is one of the most satisfying investments in life. Keeping a well-maintained home with attractive landscaping helps to ensure you get the best value from your home while also supporting the values of your neighborhood. For construction, permitting, or appraising purposes a set of final customized construction drawings is vital to making the process go smoothly while also ensuring that you get the best possible value.