“Instant equity”…what am I missing?



New to the sub, so hoping for a “no stupid questions” policy. Before I get roasted too much, please excuse my ignorance as a first time buyer. I’ve done some digging, but not able to find a clear answer on this…

Background: young family searching for a first home, but quickly realized the “sellers market” wasn’t meeting our expectations. Homes were selling for much more than they seemed to be worth (to us at least) based on square footage and build quality. We really struggled to find what we were looking for and honestly it became a little depressing after the initial “pre-approval” excitement phase…

Luckily for us, my older half-brother is a successful builder in the area and is willing to give us the “family discount” on a new build. We are considering building a custom home in a established, well-regarded subdivision with median listing prices around $425,000 (range, low 300s to 1 million plus). He can build our “dream home” in the $300,000-325,000 range (including his markup), not including the lot we own and the developers commission (1.5%).

The concept is 3,600 square feet, 4bed/4.5 bath on a 3/4 acre hilltop lot with scenic views, private backyard with large woods behind. Comps in the area seem to go for $450,000+ based on square footage, location, and number of beds/baths. Great area with lots of charm, parks and rec, and just 15 min commute from a metro downtown in the Midwest.

We are looking at this as a long-term residence, but at the same time it seems foolish not to want to maximize value/equity if possible. In terms of mortgage, my understanding is that the home is valued at whatever we pay for it initially, as the bank is going to consider the lower of the sold price vs appraised value. So even if you get a “great deal” on the home, you would still be on the hook for PMI, etc. if we put less than 20% down. And essentially “instant equity” is a myth…

My questions are: is the equity situation different if we carry the construction loan vs my brother (the builder)? When could we take advantage of the fact that our home should be worth much more than we paid for it, or are we always going to be limited by our initial price? From my perusal, it seems it could take years and a subsequent refinance/reappraisal, which seems a little disheartening…But I also haven’t read about anyone in this exact situation and no one has been able to give much advice to this point.

Appreciate any expert opinions/suggestions!

submitted by /u/thefizzyliftingdrink
[comments]



Source link