Valuing your Home before Construction

I spoke to my bank yesterday with regards to the construction loan, we have the land loan to which we are adding the construction loan. We also have other home loans with the same bank. I bank spoke about maintaining the 20% equity in the mortgage so as to avoid Mortgage Insurance. I was asking about HOW the bank was going to value my home for the loan before it was built, and was informed that they will value the land against other property in the area (being an older area there is harder any land available, so it isn't just a matter of saying all land it going for a certain price like in a new estate). But the bit I found a little silly was the way they are valuing the house ...
She informed me that they would take the contract value (from the builder) and any quotes we have for extras (ie. pool, driveway, air conditioning) and just add them up and THAT was the value of the house. Surely this HAS to be wrong, if I give them all the largest quotes, it will increase the value of the house, and then if I use the lowest quotes it will mean I have to borrow less - meaning less likely to pay mortgage insurance.
This doesn't seem right to me, does anyone know if this is correct????

That is correct. Valuation is generally done on basis of land value plus construction costs. They don't value the property on what the "end value" may be.

There is also the chance that they might not value the construction at cost, it might be lower if there are things in the building contract that they perceive won't add value.

Cheers

Tom

Tom, thank you so much for your information.

Would you mind sharing which things we should bother adding quotes for?

I was thinking of adding quotes for the following
-Gas Log Fire Place
-Landscaping to the front yard (Front paving, fencing, gardening costs)
-Ducted Heating and Air Conditioning
-Dishwasher
-Water Tank
-Security System
-Feature Tiles to the Front of the House (we are doing this ourselves as the builder has quoted $4k)
-Spa

It depends on the area but generally speaking it would be:

1. Dishwasher
2. Ducted Air Con
3. Landscaping

Regards

Shahin

It all depends on the lender and whether they will accept quotes for works outside a builders fixed price contract. Some won't allow anything while other will allow extras like driveways, fencing, air con, etc.

It's best to talk to your bank and see what items they will and won't include.

Cheers,

Tom

Most lenders will also look at the median value of the street. If you have a $200,000 block of land and are building a $400,000 construction contract on it, but the median value for the area is $450,000, they will consider you to be overcapitalising and will value at at less than you are spending.

Im going through a similar situation where the bank has had a valuation done on our home to be constructed. The feedback we have received from the bank is that they look at the average construction costs per square meter for that area/suburb and apply them to your build. Hope that makes sense.