Nightmare on Log Street:
How building too big or too small a home can be scary
Kevin J. Daum

This article was originally published in the March 2005 edition of Log Homes Illustrated magazine.

Everyone in the log home industry has heard nightmares about how hard it is to finance log homes. Truthfully, log homes aren’t much harder than conventional homes. But log-home people have different needs then stick-home people. Log-home people are so enamored with building a log home that they tend to ignore basic tenets of financing homes. The aspect of home building that seems to elude the industry as a whole is that not every lot or consumer will financially support any size log-home project.

We have all heard about the difficulties of getting bank appraisals on log homes. The biggest obstacle is the need for log-home comps. While it’s true that most banks want to see at least one log-home comparable, this not where most projects get into trouble. Most log home financing problems come from under-designing or over-designing the house for the land and neighborhood and sometimes the consumer’s financial ability.

Part of the problem stems from the nature of the log-home industry. The log-home companies have the best sales structure in the entire custom home industry. Each company has expert sales people eager to help you the consumer build the home of your dreams. So accommodating are these dealers that they will let you design any home you want and help you save money by locking it up with a non-refundable deposit before the next price increase.

While well meaning, there is a gap between the dealer’s responsibilities and the reality of financing your project. Most dealers have a very narrow understanding of the restrictions and guidelines associated with financing construction. It’s not part of their normal process. Many of them may have a relationship with one lender or another and think that bank can handle all situations.

It’s not true. Since most dealers and lenders do not educate you on financing information before you design the house, you are responsible for making sure you can finance the project before you lay out a deposit. If you fail in deciphering the lending world it can cost you your lifesavings. Allow me to share a recent example.

At our last log-home show, a couple asked us to help them finance their project in a rural part of Colorado. They were in escrow to buy the land and they had already picked a prominent log company and designed a home. They never shared any of their financial information with the dealer. They were never asked to. They spent a lot of time discussing the needs of the family and had decided on a 5,000-square-foot house with a large guesthouse.

Everyone thought it was perfect. The couple had sold their house already so they had plenty of cash for the large deposit. The dealer told them they would save $10,000 by paying for half the package now even though they had no land yet.

As it turns out, the couple had average credit and good income but not enough to qualify without a No-Income-Verification (NIV) loan. That being said there was only one institutional lender available who could handle a loan for a log home with NIV and medium credit scores. This was a different lender than the dealer recommended. That lender would have turned the loan down flat.

Meanwhile the bids were coming in on the build-out. The project would be $150,000 more than originally thought. My team worked diligently. We helped the couple boost their credit scores and helped them restructure their cash and building costs so they were liquid. We found the right NIV program and requested the highest loan possible. Then came the appraisal.

The property was a huge over-improvement for the neighborhood. Even though we had a log comp, this project was 1,500 square feet bigger and $150,000 more expensive than anything else having sold within 15 miles.

While we worked with the appraiser, the log company started pressuring about delivery since the logs would be finished soon. The seller raised concern about the escrow closing. The couple had the cash to close the lot or pay for the logs but not enough for both. Even if they could pay for both and deliver the logs to the lot, they would have no money to build without a construction loan, and the logs would warp while sitting outside for another year.

The appraiser did the best he could on the property, but still the appraisal painfully showed the excess of this mansion in a neighborhood of modest homes. And the guesthouse was adding no value at all since there were no other guesthouses in the neighborhood for the appraiser to compare. We begged the couple to eliminate the guesthouse, or reduce the house, but they said it was too late since the log dealer had already started to make the logs.

We had the appraiser document as best he could and submitted the loan to the lender. The borrowers squeaked through the approval process, but the appraisal still had to be reviewed. After a week of nail biting, the lender said they found the property to be unacceptable and refused to make the loan. It had nothing to do with being a log home. It had everything to do with over-designing for the property.

Fortunately, we were able to get private money for the client, but it was more expensive, and they were forced to restructure their finances to barely make it work. The increased cost on the loan was three times the savings on the log package, and they will still have to pay for permanent financing when the house is finished.

What’s the lesson in this? Several things could have been done to stop this train wreck before it happened. Here is my list.

Pre-qualify with a lender first, before you sign anything or pay deposits. Offers from dealers may sound attractive, but you could simply be throwing money away if you don’t have the means to complete the project.

Accept the fact that no one is responsible for your financial ability except you. The log-home companies and dealers are in the business of selling log-home packages. They are not lenders, and most are not familiar with lender guidelines or your neighborhood values. They generally assume that you wouldn’t be buying it if you couldn’t afford it.

Close your land before you purchase a log package. This takes away any time pressure so you can handle one financial transaction at a time.

Investigate your neighborhood when you buy or before you design the house. Work with a real estate agent to find out what houses are selling in the area and how much they are selling for. Your appraised value will depend upon those comparable properties; the further you stray from what is typical, the more it will negatively impact your value.

Do not over or under build. If you build too big for what the neighborhood will support, your value will not support the cost to build. The same is true for building too small a house. Building a 100-square-foot cabin in a 2,500-square-foot neighborhood may sound like a way to save some dough. Unfortunately, the lender will tell you that the marketability of that tiny house is diminished and may refuse to lend altogether.

Slow down! What’s the hurry? You hope to have this house for the rest of your life. So what’s the big deal if you have to wait a few more months – even if it costs you a few thousand for a price change? This project is probably the single biggest expense in your life. It deserves your full attention to detail. Don’t rush into things just because it sounds good. Spend as much time on the ugly stuff, like financing, as you do on the pretty stuff, like windows and countertops.

Watch your credit. If you are heading into a big financing project, sometimes good is not good enough. Make your payments on time. Keep your credit card balances down. If you think you might have a problem, get a copy of your credit report so you can work on fixing it.

Hoard your cash. Cash on hand is the primary problem solver for situations like this. Don’t pay for anything until you absolutely have to. You not only will need cash for the project, you will need it for reserves to qualify, and no bank will lend just on how much you have put into the project.

Be your own best advocate and do your homework. Don’t take anyone’s word on how things work until you have spent the time to get fully educated on the subject. Ask as many questions as you can to understand the repercussions of your decisions. This is your home and your lifesavings. No one will care about it as much as you.

I realize this case may seem like an extreme one but stuff like this happens all the time. Even in the deals that go smoothly, often consumers make significant financial mistakes. This happens because good information is very hard to find on this subject, and not enough people spend the time and energy to go find out about it at the very beginning. Be smart: Set up your financing guidelines first, then design your house and budget to fit what you and the property can afford.

About the Author...
Kevin Daum is the Founder and CEO of Stratford Financial Services, a Real Estate finance and education company, founded in 1989. Stratford specializes in Purchase loans, Refinance loans and Custom Home Construction finance for California and has successfully financed thousands of clients. He is the author of the forthcoming "Building Your Own Home for Dummies" (Wiley), as well as "What the Banks Won’t Tell You." Mr. Daum was an Underwriter for Plaza Savings and Loan and Key Bank of New York. He is an INC 500 CEO and has been listed as one the 40 Most Influential People Under 40 in the San Francisco Bay Area. He is the Global Chair for the Edison Innovation Program with the Young Entrepreneurs' Organization (YEO) and is a founding Board member of the Bay Area Chapter of YEO.

Mr. Daum is a frequent contributor to numerous business publications on the subjects of Real Estate and Small Business leadership and speaks regularly on both subjects. He can be contacted at kevin@stratfordfinancial.com.