Our story on Page One today takes a look at how folks who want to build or buy homes with unusual materials are having a lot of trouble getting financing because underwriting standards are much tighter today.
The problem: homes made of tires or houses caved into mountainsides don’t have any comparable sales. Without “comps,” banks won’t lend.
Even home buyers living in regular homes might be more familiar with these struggles. Appraisals have emerged as a big obstacle for homeowners of all types during the housing downturn because with fewer transactions and rapid fluctuations in prices, putting a value on homes is more difficult. In some markets, prices are falling so fast that lenders won’t accept comparable sales that are more than three months old. And reeling from rising losses, lenders have urged appraisers to be conservative.
Appraisals are designed to protect homeowners from overpaying for homes, but many agents and builders say that the pendulum has swung too far in the other direction. Lou Barnes, a mortgage banker in Boulder, Colo., says that tough appraisal rules, more than stringent underwriting guidelines, have made it much harder to get mortgages for million-dollar homes. Those homes don’t sell often as it is, and banks are requiring a tighter radius and narrower time frame for acceptable comps.
Off-grid and specialty construction homes have long faced a challenging financing environment, but agents say that things today are unlike anything they’ve seen. “Dome financing has tightened up so much,” says Neal Langholz, a real-estate agent in Santa Cruz, Calif., which has a sizeable market for eccentric homes. “Now the lenders want to see more standard housing and more standard shapes—rectangles and squares.”
Last fall, he sold a domed three-bedroom home in Aptos, a coastal hamlet, for $480,000, around $100,000 less than what the home sold for two years ago. He pulled off the transaction after the mortgage broker contacted an appraiser that specialized in unusual properties. While such contact isn’t allowed under a new appraisal code that Fannie Mae and Freddie Mac put into place last spring, the loan was being backed by the Federal Housing Administration, which hadn’t yet implemented those rules. “We ended up getting very lucky,” says Mr. Langholz.
Some environmentally friendly homes pose a different set of challenges—they’re considered “off the grid” because they produce their own heat and energy, which make lenders skittish. One such class of self-sustaining home, dubbed “earthships,” have proliferated in recent years in New Mexico and other parts of the Mountain West. Lenders became more comfortable lending on those properties as they become more commonplace, but the slow housing market means that there aren’t enough comps right now.
“People selling these homes in markets without any concentration are going to continue to run into difficulties,” says John Kejr, a real-estate agent in Taos, N.M., who says he was selling one earthship every month before the market ground to a halt two years ago. “Hopefully, Taos can get enough comps to open us back up to more lenders.”
Last month, he sold this two-bedroom earthship to Debbie Cowden for $400,000. Ms. Cowden, 60, lives in California and plans to operate the home as a vacation rental until she and her husband retire. Ms. Cowden made a 50% down payment to secure a 30-year fixed rate conforming loan, and says she was surprised that the home found a willing lender. The lack of a heat source—the house doesn’t have a fireplace or wood-burning stove—would be a “deal killer here in California, but they didn’t say a word.”
The biggest hurdle to these transactions is to prove that the homes can be sold, says Jim Tulin, the Arizona mortgage broker who arranged the loan and specializes in environmentally-friendly homes. That was easier with Ms. Cowden because the home, as a vacation rental, had proven that there was market demand.
“If you tried to do this in Queens, it’s not going to work,” he says. “But when you do it in an area where that is the norm, there’s less to challenge.”