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The process of financing a log or timber home hinges on several factors — cash, capacity, credit and comps just to name a few. These “comps,” or comparable sales, will sometimes be a challenge, but they are critical in the appraisal process, as they contribute to the determination of the actual or projected value of the property. Here’s what you need to know.
What Is a “Comp?”
“A comparable sale [or comp] is the reference to an earlier transaction involving similar property, which helps establish a baseline or expectation of the subject property’s value,” explains Robert Jones, executive vice president of the Federal Savings Bank. In short, it’s a major factor in the appraisal process.Why Does It Matter?
The appraisal tells the lender how much the property is worth, which helps determine how much money you can borrow for either buying or building a home. This amount is compared to the property’s value to calculate what’s called the loan-to-value ratio.From there, further calculations are concluded, such as the monthly payment of principal and interest the homeowner will be obliged to fund and any specific limitations to the property value like location and size of the home site, ingress and egress, quality of construction, access to utilities and infrastructure, and even the useful economic life of the structure itself.
Robert has seen thousands of appraisals during his years dedicated to financing log and timber homes, and his perspective is clear — appropriate comparable sales directly impact the quality of the appraisal. However, log and timber home appraisals can present a unique challenge.
The Challenge
“The sales of other log and timber homes set the bar for the subject property, but finding such sales can be a tough task,” Robert explains.
The essence of the “comp challenge” lies in the fact that sales of log or timber homes are often fewer and perhaps more widely dispersed than those of conventional homes. When the subject property is in an area that is more likely to include log or timber homes — and ones that were bought and sold in recent months — the task of obtaining valid comps is easier.Appraisers sometimes may be compelled to use conventional sales to derive a value of the subject property, and the process may well involve more significant adjustments to the final valuation, either “as is” or “on completion” if construction is involved.
What You Can Do
In any situation, finding a competent, professional appraiser is key.“It might be helpful early in the financing process to check local records or ask the lender or a trusted real estate professional about their awareness of existing log and timber home sales that have occurred in recent months,” Robert suggests. “Further, it is absolutely fine to ask about the appraiser’s qualifications. An appraiser with experience in log and timber home valuation is a plus for sure.”
Bear in mind that federal regulations require that the lending institution engage the appraiser, not the prospective homeowner. The valuation is required to be independent, and lenders often engage a third-party service to order and review appraisals to ensure that ethical standards and actual content requirements are upheld.
Nevertheless, the homeowner or borrower has the right to review the appraisal, ask questions and evaluate the findings. If the appraisal result is lower than expected, the borrower is always free to request another review or possibly even a second appraisal. After all, payment for the service is coming from their pocket, and the influence of the report on the entire transaction cannot be overestimated.
