The cost of non-conformity - part 2
In part 1 I described the “joy” of getting finance for my farmhouse / shop project. Next came the challenges of actually closing on that financing.
The commercial lending department needed an appraisal on the construction project. Since it was new construction the apraisal would bve based on plans, specs, and quotes along with the estimated value of the land - which I already own.
The land itself, would seem pretty easy as it already existed - with a few exceptions, they are not creating new land these days. But nothing is easy with a non-conforming project. The larger a piece of land, the fewer parcels there are to compare it too and the less frequent those comparable pieces of land are bought and sold. So, to get an estimated value, the brokers can not look at “plots in the same area that have sold in the past 6 months” - the usual formula for estimating land value. Rather, they go back as much as two years and as broad as a 50 miles radius. A lot can change in two years and 50 miles. Economically, a lot has changed - so the land value was a huge guess by anyone’s estimation. Still, they crunched the numbers and came up with an estimated value.
Next came the appraisal of the construction. They looked as the architectures, the materials, the renderings, and the quotes. When it was all said and done, there were 64 pages which did not include the photos. When I read the appraiser’s report I wanted to yell and scream … but it would have been pointless. The value of the land was a bit better than expected but the rest was a huge disappointment.
The report started out well enough with a statement that “due to the complete lack of sales of bulk properties with large buildings similar to the subject, the ‘cost approach’ will be utilized to estimate the value of the subject property. … Because of the subject’s somewhat unusual features such as geo-thermal heat and finished living area, some reliance has been placed on the contracted prices.” I read that to mean the estimated value would be the cost of construction. I was wrong.
Within a few more pages, I hit a new term - “functional obsolescence”. This means the “loss in value due to a lack of utility”. the report went on to say, “The subject improvements are a combination living area / work shop and as such have a questionable market appeal because they are somewhat unusual.” Then the bomb hit - “Although there is no straight forward market data to indicate the precise amount of [functional obsolescence] depreciation, due to these factors, it is the appraiser’s conclusion that it should be substantial and that a charge of 50% of the building cost should be made.” In my questioning I was told right to my face that “geo-thermal may be good for the environment and a long term investment but it’s risky from the point of saleability.” WHAT !? - Lower energy bills is a negative sales incentive ?!
In short, the appraiser said that my new home is worth half of what it will take to build it !
I would agree that it it not a mainstream project but I guess I know a lot of people who would love a big heated workshop attached to their home - suitable for a trades person, a craftsman, a mechanic, or semi-retired tinkerer. I would expect that would translate to a slower sales cycle if it were to ever go on the market but I would not expect the bank to discount the sale 50% to get out quick. But that is exactly what the appraiser said and his word was in 64 pages of black and white reporting.
I contested the appraisal. Nothing came of it. Fortunately, I have a lot of equity in the land but that still did not dull the sting.
There was still more salt to be spread on my wounds before I could close. I needed insurance on the “yet unfinished” project. I went to my insurance agent and asked for a quote. It was ready in about a day. Once again “non-conforming” was the explanation. It did not matter that the building was steel and should get a much better fire rating. Nor did it matter that I had designed for 115 mph wind loads and my rating against hurricanes should weigh in my favor. Nope - turns out the computer program for estimating insurance doesn’t have input fields for these things. So, in stead, I get hit fo the size of the building as if it were all living space.
I was told, “It’s just the price you pay for doing something different.”
(to be continued … if I can stomach writing more of this saga …)
