If you have been lucky enough to avoid the stock market crash, the real estate market crash, and the new construction crash and are thinking of building a new home or remodeling you may find the recession is still going to affect you. If you are building or remodeling you might already know that many good contractors have packed their bags and the labor market for quality subcontractors is shrinking. Prices on some products have come down, but in general the cost of building is still high (in some cases prohibitively).
But, something that few of us expected was the extent of the problems with the banking industry. Something we have been encountering with increasing frequency is projects that won’t appraise. Anything above basic construction has very few “comps” for appraisers to use to validate the cost of construction. With the banks “running scared” they aren’t going to look at any project that is out of the ordinary. If you are hoping to finance 90% (or even 80%) of the project, you may be in for trouble.
For contractors this new world of tough appraisals is particularly frustrating for several reasons. First, many projects die because the homeowner needs to finance most of it – period. Even worse, is the “credibility” problem created when a project doesn’t appraise. Homeowners that have more available cash, or equity, but are still tied to a bank and an appraisal start to think that their contractors are gouging them because the project didn’t appraise.
Another situation we have seen recently is the new construction process that is waiting to be launched as soon as an existing residence has been sold. In the “good old days”, clients might start construction as soon as they had a viable offer on their existing residence (at a minimum that started getting things ready to roll). These days you might find out that you have someone willing to pay your price, but the bank appraisal won’t fly and the deal is now dead. Don’t get your hopes up, and certainly don’t start your new construction project until all the contingencies on the sale of your existing residence have cleared. If you are really conservative, be prepared for the double move. Sell (and close the deal) of your existing residence, and move into rental housing before you start your new project. Needless to say, that frustrates your contractors, but they are getting used to the new reality of today’s market.
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