The way to handle it is to re-negotiate the sales contract price based on the appraised value. I don't see how you can compare a city lot to a two acre parcel with a new build. You need to have sales that are truly comparable to the subject property and that means having the same attributes (including land). It's possible that the appraiser has the "wrong" value, but the lender will use the appraised value or the sales contract price, whichever is lower. It's also possible that the seller is trying to get too much for the property. If you can't get the seller to drop the price to the appraised value, perhaps you can negotiate a price that is higher than the appraised value. If you do that, then you need to bring cash to the table for the amount above the appraised value. If you can't come to a meeting of the minds, then it's time to find another property.

Construction has not started yet? Who owns the land? You? Do you owe anything on it?

How will construction be financed? You? The builder?

How much are you putting down? Do you have a 20% contingency requirement on the construction loan?

So many questions before anyone really knows what is going on.

I was in a hurry with my original post. My apologies. Here is a bit more information.

The land is mine and is owned free and clear. Purchase price was $42K, appraised value was $52K.

Construction will be financed via a construction loan from the same bank that will be providing the permanent financing. We plan to finance 100% of the cost to build. The VA allows 100% financing without requiring PMI. We will still have the equity from our paid for lot.

Contract price for the building of the home is $381K and is a fixed price contract. Allowances were based off of our selections in most cases. This price is similar to a neighborhood of spec houses that have been recently, with the largest lots just under an acre.

I have a reasonably large contingency fund (just over 20%) to cover unexpected costs, like moving our house site back 30 feet and having to extend the driveway.

I am hoping the comps provided by our realtor are enough to convince the appraiser to reconsider the original assigned value. Our lender has seen this happen quite a bit with VA loans lately. I was just wondering if anyone had been in a similar situation and how it turned out. Sorry I did not provide all of the info in the original post. Hopefully, I made things a bit clearer.

Appraisal for 100% are notoriously hard to get. Some of the pros will probably weigh in, but it appears the appraiser does not value the whole as the sum of the parts, which is quite common.

Can you talk to more than one lender?

Good luck!

The appraisal would only really need to be for the cost to build the home, as the lot is paid for. I figured the appraisal would come in a smidge over the cost to build. I was definitely not prepared for it to come in so low. Oh well, just another hoop to jump through on our long journey to our forever home! Thank you for the replies!

The lender and the VA want the appraised value to cover the lot and the market value (not cost) of the house. You should not call the appraiser, your Realtor should provide recent closed sales that are similar in size, amenities and type of house as your will be. And the Lender needs to go back to the appraiser with that information, and ask him to reconsider his appraised value.

Hi SaltiDawg - if that question was directed to me, the bank did an initial appraisal (value determined from the lot and the house build specs), and then a final appraisal based on the house as it was actually built. (Edited to add, I may not be using the word "appraisal" in the correct/technical way - but they decided how much to lend me based on their valuations.)

Waiting for the final appraisal was a bit nerve-wracking as I didn't know how much extra cash I could need to close!

SaltiDawg, all construction loans require an appraisal to be completed based on the plans and specs of the house to be completed, compared to existing homes, before construction starts. This is to ensure that the costs to build the house do not make the property more expensive than the market value of a similar house. If the appraisal was done after the house was completed, the VA and the Lender could be stuck with a mortgage on a property that was now higher than what the market would pay for that completed house. I hope that makes sense.

The appraiser determines the "as completed" value.

I didn't mis-read your post. "Most" people apply for their construction loan and their end loan (VA in this case) at the same time. So they get one appraisal to use for both. When the house is completed, the final inspection also includes a recertification of value.