As more than a few people might agree, trying to get a house built in Kiowa County can make pursuing the “American Dream” feel more like a nightmare. Without a doubt, there are clear benefits to building in the county, not the least of which are lower land prices and less restrictive building codes. But once prospective home builders actually begin the process of trying to get a new home construction loan, they can find themselves facing obstacles and restrictions that can be difficult, if not impossible, to work around.
“The problem is with appraisals,” states Sean Lening, President of Kiowa County National Bank. . Common sense might suggest that, if it costs $200,000 to build a home, the home would appraise, or be worth, that amount. However, the appraisal of the value of a home is determined by the market value, not the cost to build, and the market value is determined by what price the home would most likely bring in an open, competitive market. Appraisers estimate that price by looking at every aspect of a house—in the case of new construction, square footage, bedrooms, bathrooms, everything included on the house plans as well as type of materials to be used—plus neighborhood, location and view. They then look for houses that are comparable--that is, with characteristics as similar as possible that are located nearby and have sold within a certain period of time. Once comparable houses are found, some appraisers “toss out”—or remove from consideration—the highest and lowest priced houses. The sale prices of the remaining houses are used to determine the appraised value of the home to be built, and that number determines how much money a bank will loan to build.
It sounds like a relatively straightforward process but, in reality, and especially in the reality of Kiowa County, it’s frequently far from simple. The first challenge is the shortage of appraisers. “There just aren’t that many appraisers in this part of the state,” says Lening. “Sometimes we have to go far enough away that the appraisers aren’t familiar with our county, at all.”
The second challenge is that not all appraisers appraise in the same manner. While the rules for appraisal are spelled out, no set of rules can cover all the potential situations, resulting in gray areas where different appraisers appraise differently. For example, appraisers are instructed to look “nearby” for comparable houses. However, one appraiser may define “nearby” as within the radius of a certain number of miles while another may define “nearby” as only those houses located within the same county. Obviously, how an appraiser defines “nearby” can be the deciding factor in whether or not prospective home builders get a loan sufficient to build their new house.
In a large, sparsely populated county like Kiowa, houses are rarely put on the market, which makes finding a comparable house almost impossible. As stated, even if a comparable house is found, other factors—such as location—will automatically reduce the value of the house. For example, Kiowa County is considered to be a “depressed” county; consequently, the value of the house is potentially reduced by up to 20% simply because it’s located in Kiowa County. “These things just hammer the value of the house someone wants to build,” Lening states. “In the end,” he adds, “a new house built in Kiowa County will usually be worth about fifty cents on the dollar, so that’s all we can loan.” The result? “People have to come up with a 50% down payment. That’s a hundred thousand dollar down payment on a two hundred thousand dollar house. Most people just don’t have that kind of money.”
The tendency is to blame the local banker, but, as a wise man once warned, don’t kill the messenger. “I can’t get a house built for my family, either,” Lening admits with a hint of frustration. However, he is optimistic that some change might be on the horizon. “Things are beginning to loosen up—at least, a little,” he says.
Brett Legg, President and Chief Financial Officer of Eastern Colorado Bank in Cheyenne Wells, echoes Lening’s views. “It’s all dependent upon the appraiser,” he says. “There aren’t many working anymore, and sometimes we’ll have to get them from Pueblo or Colorado Springs. So, at the beginning of the process, the most important question is who is going to do the appraisal?”
Legg states that some appraisers are unwilling to go outside Cheyenne County to find comparable houses, which makes getting a reasonable appraisal—and, consequently, building a house--very difficult. However, other appraisers are willing to include Burlington in their search for comparable houses. In reality, Burlington fits the criteria for being “nearby”; although the town of 4,000 is not located in Cheyenne County, it’s only 33 miles away from Cheyenne Wells.
Once the appraisal is done and has delivered an estimate that is reasonable for new house construction, the bank is aggressive about looking to several different sources for funding. Typically, the bank will require a 20% down payment, with an 80% loan to value ratio. However, they can also fund 95% loan to value ratio, provided the client carries private mortgage insurance, which can be costly. Another source they have used in obtaining a loan is through the Farm Service Administration, which will finance a loan at 100% and has flexible criteria in qualifying for a loan. However, the FSA loans have a limit, which is pre-determined by county. In Kiowa County, the FSA will not loan more than $216,000 for a house, which may not be enough to build an expansive house loaded with amenities but can certainly provide enough resources for a good, basic house. Finally, if the client has substantial income and net worth, the bank will consider a straight finance loan.
In all of these options, Legg’s attitude is clear. An economy won’t survive without growth, and growth won’t occur without at least the attempt at a robust housing market. For this reason, the bank has developed an attitude of persistence and assertiveness in doing all they can to get new houses built in Cheyenne County.
Despite the challenges inherent in building a new home in a rural area, an understanding, sympathetic attitude like that displayed at Kiowa County National Bank combined with assertive, determined practices like those displayed at Eastern Colorado Bank might, someday, result in just enough support to make fulfilling the “American Dream” a little more likely.