That’s true, we didn’t have a construction loan and used our own cash proceeds from the sale of our prior house (which wasn’t meant to be a flip but ended up being a very profitable deal).
Even without a construction loan and a very small mortgage, relative to the property value, we ran into some crazy issues with our bank. When we bought our house (and we were very up front with the bank’s mortgage guy that it was being bought as a fixer and we were going to tear it down completely), we only financed about 40% of the bank-appraised value of the property, yet the bank had a FIT when they found out we were tearing down the house.
It happened b/c I called them to see how we should list them on our course of construction insurance policy, and somehow the message fell into the hands of a VP of Risk Mgmt, and she called us and demanded that we immediately put a halt to our demolition plans, stating that the house represented their collateral so we couldn’t touch it before our construction plans and permits were seen and approved by the bank’s construction committee. We were shocked especially because, according to the bank’s own appraisal done 3 months prior, it stated that 90% of the property value was in the LAND and 10% was in the old delapidated house. When we pointed this out to them, plus reminded them that we were using 100% of our own cash to actually increase their collateral at no risk to them and make it even more valuable, they still wouldn’t budge. We finally had to go up several levels to a Sr VP who saw the light, but their VP of Risk Management (or something like that) was totally irrational about it and even at the end of the project, she made sure that they re-appraised the property. Surprise, surpise, the bank’s collateral dramatically increases in value when the owners sink their own cash in to tear it down and then double the square footage.
Of course, we understood the premise behind not being able to knock down a mortgaged house without bank approval, but in our case, it was irrational for so many reasons, yet the bank couldn’t think clearly about it.
Just goes to show how rational thinking goes out the window in times like this. The bank’s underwriting pendulum was swinging in one direction the year before our remodel, and the year of our remodel, it was swinging wildly back in the other direction with no human being intervening to make more rational decisions during either period of time. Crazy.
