It’s funny, because 5 years ago “home appraisal”, (aka “bank appraisal”) wasn’t a topic that came up very often. With the volatility in home prices in Guelph over the past few months, we hear more and more about home appraisals from a home buyer. And, in the past month or so we have seen some ugly situations.
Here’s a quick summary video before you read the blog post:
So, let’s start with the basics:
What is a home appraisal?
A home appraisal is the banks reassurance that what a buyer paid for the home is actual market value of the property. Your mortgage broker wants to ensure that they limit their risk when approving you for a mortgage. With rising mortgage rates, this is extremely important to lenders to help you get the best mortgage rate.
It’s worth noting that in the event you don’t require a mortgage (you’re purchasing in all cash), a home appraisal isn’t relevant. Spend your time reading a different blog!
For the rest of us in the home buying process, home appraisals are done on all types of homes. From detached, to semi-detached townhouses, condos and more. It’s much easier to determine appraisal value of a condo, because they’re very similar in design, layout and size.
Let’s use a home appraisal example:
In February 2022, you buy a home you love. In this scenario, the asking price was $799,900. However, the seller chose to hold offers and will be reviewing any and all offers next week. Using a holding offers strategy is a key indication. The seller/ agent believe that the house will sell over the asking with multiple offers.
You and your real estate agent do your homework and sure enough. You find that recent comparables show that the house is likely worth around $900,000 in todays market.
Offer day comes around and there are 5 offers on the house. You really want it (because it’s awesome) and decide that you don’t want to lose it.
So you offer $1 million dollars without any conditions (most likely that’s without a financing or home inspection condition). The seller accepts your offer and the selling price is $1 million!
Now what happens in the home appraisal process?
Your mortgage lender (let’s say it’s RBC), the one who is giving you a mortgage isn’t in the business of home appraisals. So, their process is to hire a 3rd party company. They specializes in these to go out and appraise the house.
The third party goes to the house, assesses the lot and interior and then pulls recent comparable homes sales. They determine what fair market value is and give that report to the lender (in this example, RBC). The appraiser has access to the public records and can access comparable sales on their own.
And let’s also assume that the home appraisal comes back at what we already knew market value was: $900,000.
RBC comes to you, the buyer and says they have a problem. You paid $1 million for the home but the appraisal says it’s worth $900K. That low appraisal results in a $100,000 gap.
Uh oh, now what happens?
RBC is going to tell you that you need to make up the difference in the appraised value. This is $900K versus the $1,000,000 purchase price in order to get a mortgage. In other words, you need to find an extra $100,000 by the closing date.
You should factor this in and ideally you have a larger downpayment that can cover this. If not, you’re putting yourself at significant risk.
Maybe you may be knowingly overpaying for (or over valuing) a home for a specific reason. As an example: what if you bought the smallest, most outdated house in a neighbourhood that is transitioning? Or maybe the home has tremendous value because it completely lacks any curb appeal landscaping that others may have overlooked.
An appraiser is looking at historic sales, but you see a big change coming in the future. This does happen and it can be very lucrative (read Ryan’s related article: Tim Hortons near me)
What are the buyers options?
Buyers have a few options here. As banks have been bombarded with mortgage requests over the past year, appraisers have also been hard at work trying to keep up. Often times, the banks end up with an appraiser who isn’t familiar with the local market.
This means that the appraisal may not be using the best comparables.
- You can ask the lender to get a second opinion (another appraisal). After all, it’s tough to just make a decision on one persons opinion. The banks may agree to do this, they may also pass the cost onto you, the buyer.
- You can appeal the current appraisers value. This would require input from a Realtor who has access to the same comparables
- You can simply pay the value difference that the lender tells you they require (in this case, $100,000)
One thing a buyer cannot do, is attempt to get out of the transaction. They are in a firm and binding agreement that could have serious, significant financial implications. Sometimes buyers think they can just forfeit their deposit- but it’s not the case at all.
Is just paying the difference a bad idea?
Not at all. If you have access to another $100,000, it just means that you need to borrow less. As a result, your mortgage will be $100,000 less. It just puts less risk on the bank. If your downpayment goes from 20% to 30% because you have to pay more upfront.
How do you avoid issues with a home appraisal?
The easiest way to avoid an appraisal issue is to have a conditional offer on financing in your offer. However, this is not likely to fare well in a strong sellers market. Additionally, financing conditions are usually 5 business days. However it can sometimes takes weeks to get a home appraisal (meaning the financing condition isn’t likely to help anyways).
Beth and Ryan, Guelph real estate agents suggest familiarizing yourself with prices for similar homes in the area. Doing this over time (or reviewing comparables) can give you a familiarity of similar priced homes. A property’s value becomes a lot easier the more you know.
Another way that you can avoid issues with a home appraisal is by having the home inspected by a home inspector. It won’t necessarily impact the home appraisal report, but it may assist the lender to make final decisions after receiving the home appraiser.
Here’s a recent example:
A home appraiser valued the property’s value at what the purchase price was, but wasn’t sure if the home had UFFI (urea formeldhyde foam insulation).
Because the buyer had done a pre-inspection, the report showed that in fact it was NOT UFFI, but cellulose insulation. The lender likes this additional info and the real estate transaction would proceed without issue. as planned based on the appraised value of the home. If UFFI is present, the property would likely not have been a candidate for a loan at the higher value.
The other point is that in a sellers market, new high prices are set all the time. As a result, an appraiser has to take market conditions into consideration when appraising homes. They don’t just look at the number of bedrooms, the curb appeal and the floor plan. They look at the overall condition of the home.
Is a rural home more likely to get a low appraisal?
A potential buyer may be leery of buying a specific type of property, for fear of a low appraisal. The truth is that a rural areas is no different than urban single-family homes. The issue with home appraisals is more about the purchase price versus other similar properties that have sold recently. It has nothing to do with the type of property.
The more common your property is to get comparables, the more likely the real estate appraisal is to come back at the value of the sales price. As an example, if you purchase a condo that has had many sales, it will be easy for a licensed appraiser to determine the home’s value. The home appraiser can easily access square footage as the footprint is similar. Mortgage lenders are more comfortable with these types of property.
Who pays for a home appraisal?
Generally, your lender covers the cost of the appraisal fee. However, it’s at their discretion. Sometimes, depending on the situation (and if you require a second property appraisal), the lender may pass along the home appraisal cost to you. Typically the cost is somewhere between $400-$600.
Considering a home purchase and want more information? Beth and Ryan are Guelph Realtors and they’ll be happy to help!
This blog is part of a series 23 Most Common Real Estate Terms (2022)