Our closing date has come and gone. We stand in the frustrating position of waiting on lawyers to resolve the details of our land purchase. So we wait...the first in a long line of many delays we know. We've learned a great deal about banks, financing and the business of construction this past month. Our hope with this part of our blog is to document our process and build it as a resource for others in our position, people looking to build a well designed home affordably.
Financing
We're seeking 100% financing, a much more risky type of loan for the banks. The amount we've saved for a down payment is quite modest and not nearly enough to afford us the ability to eliminate Private Mortgage Insurance (PMI). Each year that we waited to build or buy a house we were losing out to increased construction costs, inflation, and time we could be spending building equity. Our savings rate didn't exceed any of these factors so the time seemed right. We learned very quickly that excellent credit scores means close to nothing when you're looking to borrow 100% of the amount required to buy land and build a house on it. We were naive...and, having had some time to reflect on it the special treatment we received was the privilege of buying without any personal financial outlay. Having accepted our application and approved us the next step was for the bank to choose an appraiser and evaluate the land, our construction estimates and the building design. When the appraisal was complete, we discovered that the house design was actually a liability. The way this works is this: the appraiser can evalute the submission in one of two ways. The first way is the cost approach, add up the actual costs of building the house add the value of the land and there you have it, the appraised value. The second approach is the comparable sales approach. This method looks at houses in your area that have sold within the last year that are: the same size, same number of rooms, same amenities, same lot size, same design style, you get the idea. The more similar your house is to those that have sold in the past the better chance you have of finding a decent comparable. Our problem was two-fold. One, the housing market has cooled considerably in the past year and two, our design isn't like other houses in many ways. We're trying to be efficient with space and money. We've kept a single bathroom in the entire house because we felt we couldn't afford the second bathroom. We've kept the size down and amenities to a minimum and chose to spend our money on quality materials, efficient heating systems and good insulation. Many appraisers don't reward for those things, ours certainly didn't. Needless to say, our appraisal came back significantly lower than what we were expecting which did two things. First, we couldn't borrow what we were looking for and second, the PMI payment skyrocketed because now the loan to value ratio was out of whack with the appraised value. The appraiser found the land to be valued at a higher amount than we paid for it but the house was valued at less than what it would cost us to build it. At this point we found out that the appraised value is what sets the PMI payment for the life of the construction loan (12 months) so even if the appraisal came back much higher after we were complete with the house and we were able to adjust the PMI down, we still had 12 months of PMI payments that weren't reducing principal or doing anything of use other than making the bank feel better. Here again, excellent credit scores...no value.
Thankfully, using a local bank has many advantages and this was a time where it paid off. The bank was able to reduce our risk rating and work out a PMI premium that seemed equitable. Overall, the appraisal process was a difficult one. We had to evaluate the house in a new light now. We viewed it throught the lens of an appraiser. I think this is a mistake many first time home buyers make, not understanding that it's the market that determines what's valuable, not you. This is a real frustration as the market needs some lessons from a good designer but we're working on that. We'll be adding the second 'market-preferred' bathroom to change the comparables that we'll be using for the final appraisal. We're optimistic that the appraiser didn't see many things that will be manifested in the full scale version of our plans and that in the end we'll scrape up a little equity along way.
Some of the other things we've been thinking about...
Financing
We're seeking 100% financing, a much more risky type of loan for the banks. The amount we've saved for a down payment is quite modest and not nearly enough to afford us the ability to eliminate Private Mortgage Insurance (PMI). Each year that we waited to build or buy a house we were losing out to increased construction costs, inflation, and time we could be spending building equity. Our savings rate didn't exceed any of these factors so the time seemed right. We learned very quickly that excellent credit scores means close to nothing when you're looking to borrow 100% of the amount required to buy land and build a house on it. We were naive...and, having had some time to reflect on it the special treatment we received was the privilege of buying without any personal financial outlay. Having accepted our application and approved us the next step was for the bank to choose an appraiser and evaluate the land, our construction estimates and the building design. When the appraisal was complete, we discovered that the house design was actually a liability. The way this works is this: the appraiser can evalute the submission in one of two ways. The first way is the cost approach, add up the actual costs of building the house add the value of the land and there you have it, the appraised value. The second approach is the comparable sales approach. This method looks at houses in your area that have sold within the last year that are: the same size, same number of rooms, same amenities, same lot size, same design style, you get the idea. The more similar your house is to those that have sold in the past the better chance you have of finding a decent comparable. Our problem was two-fold. One, the housing market has cooled considerably in the past year and two, our design isn't like other houses in many ways. We're trying to be efficient with space and money. We've kept a single bathroom in the entire house because we felt we couldn't afford the second bathroom. We've kept the size down and amenities to a minimum and chose to spend our money on quality materials, efficient heating systems and good insulation. Many appraisers don't reward for those things, ours certainly didn't. Needless to say, our appraisal came back significantly lower than what we were expecting which did two things. First, we couldn't borrow what we were looking for and second, the PMI payment skyrocketed because now the loan to value ratio was out of whack with the appraised value. The appraiser found the land to be valued at a higher amount than we paid for it but the house was valued at less than what it would cost us to build it. At this point we found out that the appraised value is what sets the PMI payment for the life of the construction loan (12 months) so even if the appraisal came back much higher after we were complete with the house and we were able to adjust the PMI down, we still had 12 months of PMI payments that weren't reducing principal or doing anything of use other than making the bank feel better. Here again, excellent credit scores...no value.
Thankfully, using a local bank has many advantages and this was a time where it paid off. The bank was able to reduce our risk rating and work out a PMI premium that seemed equitable. Overall, the appraisal process was a difficult one. We had to evaluate the house in a new light now. We viewed it throught the lens of an appraiser. I think this is a mistake many first time home buyers make, not understanding that it's the market that determines what's valuable, not you. This is a real frustration as the market needs some lessons from a good designer but we're working on that. We'll be adding the second 'market-preferred' bathroom to change the comparables that we'll be using for the final appraisal. We're optimistic that the appraiser didn't see many things that will be manifested in the full scale version of our plans and that in the end we'll scrape up a little equity along way.
Some of the other things we've been thinking about...
Design
Our design from the outset looked to utilize a 4' module drawn from common dimensional lumber standards. This allows us to minimize waste, eliminate labor costs for cutting irregularly shaped materials and pick from readily available off-the-shelf materials. We also agreed that minimizing the amount of structural work would save us money which suggested a single floor living concept. We knew keeping a simple shape would allow framing to proceed quickly and further limiting the width of the structure to 20' allowed us to use 2x8s for the floor framing with a simple girder system. The 20' width provided for generous proportions in the all of the rooms even given our small footprint, and allowed us to keep most spaces one room wide allowing natural light into the entire depth of the plan. Developing served and servant spaces demarcates use and activity zones and we've separated the core support services into a block in the center of the plan allowing for circulation at the perimeter. This circulation zone, while seemingly a waste of space in a small plan contributes to the appearance of a larger grouping of spaces and eliminates the double-loaded corridor so often utilized in modular homes.
The section above is taken at the living area where we chose a scissor-type truss to further expand the interior dimension. The entire roof will be trussed as that's the most economically feasible thing to do but surprisingly the attic-type truss (which allows for storage above the ceiling) is almost twice the price of the scissor-type so we've used those on the ends of the building where we can store items above the bedrooms.
Energy EfficiencySiting our house was an extremely important exercise. This can be the single largest contributor to energy efficiency along with the amount and type of insulation you add to your home. We've sited the house with the long axis oriented East/West. This allows the long flank of the south wall to collect daylight and insolation (solar heat gain). We can't afford the most efficient form of insulation today, sprayed-foam (R7 per inch), but opted to bump up the standard R19 in the walls to R21 for very little additional cost. Where we can afford it, we'll be using Energy Star appliances and the programmable digital thermostats will setback the temperature for us. The heating system also contributes greatly to the overall efficiency of our house and with an outside air setback sensor which modulates the boiler firing to limit the energy we expend on warm days.
Mechanicals
We initially assumed a radiant floor system was out of reach for us financially, however, with the advent of new heating technologies and the market permeation of PEX tubing we've settled on a non-traditional radiant floor heat system. The plan is to utilize two tankless hot water heaters , one for the domestic hot water, the other for the radiant floor heat. The boilers average about 85% efficiency and produce hot water only when demanded. No tanks to store hot water, no reheating, recycling, or firing all day long when no one is there to use hot water. Life-cycle payback times approach less than two years in many cases. Because we have two heaters ours may be a little longer, but given the rising rate of energy costs the payback times are shortening weekly.
Our wood stove allows us to streamline the heat loss calculation and keep the equipment sized at an absolute minimum. The stove is designed to release only as much CO2 as a log naturally decaying in the forest would.
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