Construction Loan Appraisal - Why don’t I get credit for things like spray foam insulation?

 

Spray foam insulation

In our years of building custom homes on our clients' land, we've seen it all in terms of additional features that clients want in their home. After all, that's one of the key reasons to build a custom home—you get exactly what you want. From spray foam insulation for energy efficiency to wrap-around porches to outdoor kitchens, you can make your new home truly yours.

The financing process can have a lot of twists and turns, including the appraisal process. Some people are frustrated when they find out that these custom features may not help the appraised value of their custom home. From the bank's perspective, the value of your new home is based on the potential resale value, not on how much money you put into building it.

If nearby homes that have sold recently don't have the same higher-cost features, they won't have the higher value either. But those are still the homes that your new home will be compared to.

Here are a couple examples of this.

Let's say spray foam insulation costs around $5,000 extra for your home. Your appraised value doesn't increase by $5,000 just because that's what it costs. If surrounding homes also include spray foam insulation and sold for enough money to absorb those costs, you're in luck. But if the surrounding homes don't include spray foam insulation, it's not going to help you on the appraisal.

Another option is a huge covered porch. Let's say it costs $9,500 extra. Yes, it adds cost, but you don't credit for it unless other homes in the area also have huge covered porches. From the bank's perspective, that beautiful porch doesn't add resale value based on comparable sale prices, so they don't factor it into the appraisal.

Now let's look at an opposite example.

Let's say you want to build a house that's 500 square feet larger than surrounding houses but has similar features. That extra 500 square feet probably means larger bedrooms or an extra family space. (If the extra 500 square feet is all in kitchens or bathrooms, this example doesn't apply, since those areas cost more to build per square foot than other rooms.)

Since the cost of adding 500 square feet is less than the average cost per square foot of the overall house, you'll get added appraisal value. The appraiser will use the average cost per square foot of comparable sales and multiple the square of yours by that amount, which increases the value of your home.

For an in-depth look at the process of building a home on your land, download our free guide:

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