Episode 203: Appraisals In New Construction

Think your custom home should appraise for every dollar you’re putting in? Here’s the hard truth we unpack: appraisals measure what the market supports today, not what it cost you to build or how much you love that premium tile. We walk through the real mechanics of valuation—cost approach versus market approach—so you can see why existing homes often hit value while new construction runs tight. From winter’s impact on loan applications and flatter rates to shifting expectations, we set the scene and then get tactical.

We share where custom upgrades shine in life but fall flat in valuation, using examples like crawl space encapsulation, pools, and high-end finishes. Then we break down how production builders create their own comps inside communities, pricing early homes aggressively and stair-stepping values with each sale. If your appraisal comes in short, you’ll know your options: bring cash, restructure price and incentives, or re-scope the build. We explain how a detailed, itemized quote plus clear plans gives appraisers what they need to select the right comps—and why vague allowances invite conservative numbers.

You’ll also get a practical playbook for planning: build cash reserves for gaps and change orders, choose specs with your 30-year payment in mind, and consider keeping appliances, pools, and outdoor features as cash projects instead of financed line items. We cover smart lending moves like flexible construction loans and using lot equity to protect your budget and monthly payment. By the end, appraisals stop feeling like a brick wall and start looking like a system you can navigate with data, timing, and a clear hierarchy of must-haves.

Subscribe for more straight-talk on building, financing, and design, share this episode with a friend who’s planning a new build, and leave a quick review to tell us your top appraisal question.

Transcript

Setting The Stage: Market Jitters

SPEAKER_01 0:05

All right, welcome back to Constructive Conversations. I'm Luke Barkstill with even an over-asking price. So that's confusing builders and sellers a little bit. Today we're going to slow it down. We're going to explain what's actually happening and uh just see you know what that means for you if you're thinking about building.

SPEAKER_00 0:21

Yeah, and from a lending side, this is probably one of the biggest friction points right now. Not because appraisals are broken, but because the market has shifted and the expectations haven't shifted yet with it.

SPEAKER_01 0:33

Yeah. So first we're going to do a little market update and just uh talk about what you're seeing in the market right now.

Winter Slowdown And Rate Trends

SPEAKER_00 0:40

Yeah. So actually looking at today's market, the winter weather nationally has actually slowed down applications overall. As crazy as it sounds, on a national scale, it has caused rates to really flatten out because there's not as much purchase or refinance applications showing up. But still, year over year, we have an increase over applications. And right now, interest rates are at one of their lower points since 2022.

What An Appraisal Really Is

SPEAKER_01 1:10

Yeah. So we're going to jump back real quick. We're going to talk about uh today's episode, appraisals. First off, what is an appraisal?

SPEAKER_00 1:20

Yeah, so I would say, you know, at a high-level generalization view, an appraisal is just really a snapshot of the overall property in today's market.

SPEAKER_01 1:33

That's right.

SPEAKER_00 1:34

So, you know, it is based primarily on the comparable sales of that property within a certain region. Um appraisal is not predicting what the future of the market is going to be. It's just real cut and dry of really where the market is today and how much it costs to build.

SPEAKER_01 1:55

That's right. So, you know, Zach, you and I talk about this a lot together. And the there's a cost approach. So as a as a builder and a designer, I see like this cost approach to houses. Um, and it's hard for me even to reconcile like this is what a house costs to build. Like, why is this appraisal not coming back? But talk to us a little bit about like what a market approach evaluation of a home is.

Cost Approach vs Market Approach

SPEAKER_00 2:22

Yeah. And so I you just really know that there are two different kinds of appraisals. There is a cost approach and a market approach. The cost approach is exactly what it says. It's the cost to build the house. It's the land cost, the labor, the materials, and minus all the depreciation. This is how much it costs to build the house. Right. And the appraiser will notate that. The market or the sales approach is what it's looking at for what the home cost based on the market, based on the comparables in the area, what the market can support today.

SPEAKER_01 3:03

And that's the one the lenders really going to go with is the market approach, not necessarily the cost approach.

Why Existing Homes Appraise Higher

SPEAKER_00 3:10

That's right. So lenders are really going to look at the sales approach with the market approach to see what other homes are selling for in that market. All right, man.

SPEAKER_01 3:21

So, like, why are existing homes right now, like why are we seeing those be a little bit higher? Because I work both sides, right? So I'm an associate broker over in Gunnersville with Ainsworth. And then we've got a building company. We do design with a lot of other builders, and everybody's seeing the same stuff, right? You're seeing new construction come in low, either right at value or even a touch low, but you're really not seeing them come in super high while pre-built homes, they're they're coming in and they're either hitting their asking price, or they may even have a pretty substantial margin over it.

Custom Upgrades That Don’t Add Value

SPEAKER_00 3:59

Yeah. And you know, the simple answer is it was cheaper to build that home. Um, and that you know, the cost to build even five, 10, 20 years ago was cheaper. The land that it was on was cheaper. And so when you look at the comparables, the market can support that cheaper sales price. Now, when you start looking at more new construction, you know, the cost of materials is just more expensive right now, right? And so builders are having to really like to build in their margin and to make money on a home, they have those real costs. So the prices are more expensive, and the market is just not supporting new construction right now.

SPEAKER_01 4:48

So I know with custom homes, you see it a lot, and and I think it relates a lot to, you know, a custom home, somebody has bought them a lot, they bought a piece of land, they went and designed their dream home, which may not be the same as the houses down the street. You know, it's probably not. It's probably got some amenities, some finishes in there. Uh, you know, a big one that we see show up is crawl space encapsulation, right? Like you, that's a it's a$20,000 plus uh increase on a house, which is awesome to do right now for a new construction, but like I guess it, you know, are we not seeing that on production homes? And you know, no if not, why?

SPEAKER_00 5:33

You know, if when you we start thinking of custom homes versus production homes, for you know, using your example, the$20,000 to encapsulate a crawl space, that is great. It's gonna save you money in the long run. You'll have less issues, but that does not increase your value$20,000.

SPEAKER_01 5:52

Right. It's kind of like putting in a pool. I think a lot of people understand the pool analogy.

SPEAKER_00 5:57

Yeah, yeah. Uh, you know, putting in a pool really doesn't add value to the home in our local market. Now, I have been told in other markets it does add value, but you know, specifically to us, you know, uh the pool doesn't really add value. And that could go the same with the crawl space encapsulation. It is going to save you money in the long run. It will be a great investment, but it does not add value. So your question going back to you know, production homes versus new construction, most production homes are doing uh slab style, monolithic slab. Um, and there's nothing wrong with those houses, but you know, they are uh you coming from the builder side, I mean, with to my in my opinion, I wouldn't think there's as much risk with a monolithic slab versus a crawl space.

Production Builders Creating Their Own Comps

SPEAKER_01 6:50

Yeah, it's all gonna depend really on like where you're at uh slab-wise, but nine times out of ten, if you've got like flat shovel ready lots, there there's less risk in that. There's you really don't have a lot of risk of water intrusion and stuff. So it's it's a pretty uh attractive thing if you're doing houses on repeat. Yeah, I get the draw. I'm not personally the biggest fan, but I get the draw.

SPEAKER_00 7:17

Yeah. And so, you know, tying it all back to appraisals, um, if you're looking at a custom home, a couple of things that you just really need to be mindful of is the cost to build is substantially more than what existing homes on the market once were. Um, and the data just doesn't really support where builders need to sell those homes in order to make their marginal profit that they have built into their business plan, right? Uh build them. But when you look at production homes, they don't seem to be running into the same issues.

SPEAKER_01 7:53

No, that yeah, I don't think that they are. It's almost like they're kind of either they're building two existing communities that are run them, or you're almost seeing them like create their own comps, right? Like they get the one going, and while it may not comp, they get that work to get that first sell, maybe with like some incentives and stuff, and then you've built out what your market is for the rest of them.

SPEAKER_00 8:16

Absolutely. And that's exactly what they're doing. They're building out these neighborhoods and building their own comps, they're creating their own comps for future builds. And that's why when you see builders really, you know, every three to five sales, they will be increasing the sales price because they can increase it slightly, where they may start out low to make sure that they're at the market and then just easily trickle it up, and it becomes a numbers game to them. Right.

SPEAKER_01 8:49

So I guess let's touch on kind of the the meat and potatoes of it. Like I've designed somebody a house, they've either come to us or they've gone to another builder, they get it bid, and then at the end of the day, they're they're short, right? Like we just had one uh not long ago. We we bid the house. I think came up like$50,000 short of appraisal. And to them, that was like, whoa, I need to pump the brakes, I need to, I need to just wait until the market adjusts to catch up. You know, in reality, what we're talking about right now is it could have been and actually was uh due to selections and things like that, like higher-end materials that maybe like didn't carry the value through. But when an appraisal comes up short, what's what's kind of like the next step there?

SPEAKER_00 9:39

Yeah, and so one of three things are really gonna happen. Buyers are gonna have to bring more cash to the table. Uh, the builder is gonna have to adjust their sales prices or incentives and restructure the whole transaction. Um, or you know, we go back to the drawing board and change the scope of work, change the specs and the arm, the finishes, and cut things out.

Itemized Quotes Strengthen Appraisals

SPEAKER_01 10:08

Yeah, I know, like, okay, if you I was talking to uh another client we're bidding for right now, and uh just this morning, and the question was like, hey, you know, this is this is coming back higher than we want to be. And to your point, it's like, okay, are they already bringing equity of land to the table? Are they already bringing money to the table? So we're not doing a zero-down, no money down build at this point. And so the question becomes like, where does the cost come from? And so what I was telling them is like you you gotta determine a what's important, right? So just as a practice, we like bidding plans as they are. If they say custom cabinets, we bid them custom throughout, and then we go, okay, that's what the plans would have you out the gate, right? Looks totally done, exactly like the plan show. Yeah, but we're we're over what the target needs to be, we're over appraisal. So now what do we bring it? How do we bring it down? If you're 20,000, 30,000, you could probably shop finishes to kind of start nicking some of that stuff down. But the way we bid it, there's not a lot of margin once we come back for negotiation. People like to think there's a lot of stuff built into a builder's price for negotiation. Really depends on how they bid, and the way we do it, it's like one for one. So your your line items, those are from a vendor, those are from subs. Those that's that is the cost to build the house. And then we'll have a builder fee that's attached to that. There might be a little wiggle room there. Typically, there's not. Um it really just depends on the house, but builders don't have you know fifty, sixty thousand dollars worth of negotiating power in their in their bid. They're they're not putting that in there, you know. Right. You know, somebody comes in and I need to cut it 100,000. That's where footage that's gotta go.

SPEAKER_00 12:06

Yeah, yeah, absolutely. And you know, that that goes to something else that's important is getting an itemized and clear detailed builder's quote will take a lot of this headache out. And it will actually help your appraisals. And that's what I've seen is because when you're doing new construction and you want to order an appraisal, I I mean, you're going out and you're appraising nothing, essentially, right now. I mean, you know, so the appraiser is having to really guess what the finished product is going to look like and base it on today's market.

SPEAKER_01 12:44

So the clearer list they have, the clearer the picture, the better off you're gonna be.

SPEAKER_00 12:49

It's gonna build a stronger case for your home appraising.

SPEAKER_01 12:53

Right.

SPEAKER_00 12:54

And so when you get something that's just, you know, not very clear, or there's hidden fees or built-in cost, and it's not broken out, it's gonna be harder to actually appraise.

SPEAKER_01 13:06

Right.

SPEAKER_00 13:06

But when you have an itemized list broken out of what the materials are, what they actually cost, and you know, you're breaking.

SPEAKER_01 13:14

So not big buckets for like, yeah, here's this giant allowance for all your finishes and everything that's gonna go in the house, but like, hey, this is actually what's gonna go in the house.

SPEAKER_00 13:26

Exactly. So the appraiser is going to get your blueprints, they're gonna get this itemized list, and they're gonna come out and value the land.

SPEAKER_01 13:34

Right.

SPEAKER_00 13:35

And then set the price based on what the market can support.

Challenging An Appraisal The Right Way

SPEAKER_01 13:39

Okay. So I guess uh one of the more like controversial things you see, can you challenge appraisals?

SPEAKER_00 13:45

Yeah, yeah, you can.

SPEAKER_01 13:47

I don't like doing that.

SPEAKER_00 13:49

No, no, and you know, appraisers will look at challenged appraisals. Uh, you can request a re-evaluation of value, and basically what you do is supply a minimum of three comps or comparables that have recently sold that you know are gonna meet the same comparable that your house is, right, and send it into the appraiser and have them re-evaluate the value based on those comparable prices.

SPEAKER_01 14:20

It's not a fix-all, but like it can it can help you in a lot of cases.

SPEAKER_00 14:25

It can. You know, I've seen appraisers uh adjust uh based on that. I've also seen them come back and say, Well, we have looked at these and did not add them to comparables, and here's the reason why. So you have an explanation, the appraiser will respond. Okay.

Planning, Cash Reserves, And Loan Options

SPEAKER_01 14:44

Well, you know, with all this being the case, like what what are some things clients can do to prepare us? You know, a lot of what we've been talking about in uh season one and some of the episodes that we're we're we're doing and up and coming is really kind of having a plan. So what is stuff, what are things they can do to plan to to maybe either not have an appraisal gap or to mitigate it when it comes comes up?

SPEAKER_00 15:09

Yeah, so a couple of the really high points to really set people up for success is having cash reserves. That that's that's the number one. Um, you know, talk with your lender. There's flexible construction loan options out there, you know. At Victorian Finance, we can do 95% loan to value. Um and that's based on the appraisal. Now, that doesn't mean that you can just come out of pocket five percent, you know, because what if there is an appraisal shortfall? Right. And we built this out, you got your quote, and then all of a sudden we got a short appraisal, and you may have to come out 10%.

SPEAKER_01 15:54

Right.

SPEAKER_00 15:55

Do you have that 10%? Or is this derailed the whole thing?

SPEAKER_01 15:59

Right.

SPEAKER_00 15:59

So it's good to budget and have that kind of cash reserve set aside in case something changes. And also in the middle of building a house, there's plenty of people, and I'm sure you see it too, where they want to possibly do a change order, or there's something on back order, and you're like, we can either wait or you know, we can get these cabinets instead, but they cost a little bit more.

SPEAKER_01 16:23

Appraisals do not cover change orders. No, they that's happened in middle middle uh midway, and uh a lot of the times that's met with a change order form that has a cost associated with it. And you know, people don't talk about that stuff, but like change orders, they're expensive, man. Yeah, no, done right, they're not cheap to do. So planning ahead is like paramount.

SPEAKER_00 16:47

It is because you know that's cost on the builder. Um, but you know, also if you're getting financed on your loan, you may be maxed out at where you qualify. Right. And then if you start throwing change orders in there, you may not qualify to roll that into financing. Talking to your lender is very important if you want to consider it a change order, but also be prepared rather than rolling it into your loan, even if you qualify for more on paper, you may not want your payment, you may be comfortable exactly where you are.

SPEAKER_01 17:18

Yeah.

SPEAKER_00 17:19

And so adding anything like a change order is gonna affect your monthly payment. And so being prepared for those cash, you know, reserve situations is very important. Uh another thing is just really being it kind of goes back to the same thing, but being flexible on your specs and finishes.

Smart Specs, Change Orders, And Payments

SPEAKER_01 17:40

I think that's very, very important. Uh, you know, people don't think about it like this, but if you're doing a 30-year loan and you're looking at a piece of tile that's$2 a square foot, you're financing that$2 a square foot for 30 years. That that's what you're doing. It's not that you're financing a house, you're financing that piece. So if you think about it like that, every decision becomes that much more important. You know, when we're we're just pricing, they they had a jacuzzi, they had a pool, and we were going to do some retractable screens. Well, through that conversation, we were like, hey, you know, part of what we're shooting for is like this monthly payment, right? And and they were like, hey, you know, let's let's pull those three things out. We can install those, we'll put them in, but it may be like a cash item or it may be a down the road item. And then that way you're not financing a pool for 30 years or a jacuzzi for 30 years, you know.

SPEAKER_00 18:38

Yeah. Yeah. Or, you know, your outdoor kitchen or just anything that's not anything like that.

SPEAKER_01 18:46

There's there are cash items, you know, uh, a lot of appliances, you know. I you know, maybe don't finance that in. Account for it in a build cost, but don't finance it in necessarily. Um, I think that's very, very important.

SPEAKER_00 19:01

Yeah. Um, and going back, we mentioned a builder's realistic and transparent quotes.

SPEAKER_01 19:08

That more transparent the better. And you know, we see it a lot. We work with uh at Viz, we work with like 28, 29 different builders. And uh the ones we work with, they they all provide a pretty pretty awesome breakdown. Uh some a little more granular than others, and that there's probably a line where that's not gonna, you know, the more granular is not gonna help you as far as the quote side goes and and getting an appraisal done. But definitely if you get a quote back that has like your house is gonna cost this, and that's all you've got, that's not gonna help you on an appraisal. You want you want some granularity to this.

Lot Equity And Budget Strategy

SPEAKER_00 19:50

You do, and the more granular is gonna be the better. Yeah. Uh and you know, the last thing I just want to mention and kind of go into the cash reserves, because you know, not a lot of people have cash on hand, especially right now. Um but lot equity can really help offset that. And if you have the option, you know, if obviously if you don't have land and you want to buy land to build a house on, then that changes things. But if you have land and you want to either consider building on it or possibly buying another piece of land, then weighing that cash reserve option should really be taken into account because the equity in that land can be used toward your down payment and building your house. Right. Then you can hold on to the money that of reserves or the down payment that you're gonna use for any potential shortfalls on the appraisal.

Key Takeaway And How To Reach Us

SPEAKER_01 20:50

Yeah, maybe some of those interest payments along the way. Yeah, absolutely. Yeah. So, guys, you know, if you're thinking about building, uh, the takeaway is gonna be that appraisals aren't the enemy, they're really a reflection of the market finding its balance again. And that's what we really think is happening right now.

SPEAKER_00 21:09

Yeah, it's not really panic, it's about understanding and how the system's actually gonna work.

SPEAKER_01 21:15

Yeah, so if you got questions about appraisals, building, or lending or any of this stuff, just you know, if maybe stirs up a question for you and you're thinking about doing any of this, feel free to give us a call, uh, shoot us an email, text, uh, just you can contact us on Facebook. Both of us have personal Facebooks, we're pretty responsive to. So if you've got any questions, uh just get with us and thanks for listening. And uh, we'll catch you on the next episode of Constructive Conversations.