For the last few years now, Canadian banks have been performing appraisals on properties to protect themselves. Let’s face it – you may have offered $779,000 for the house of your dreams, but if that house is really only worth $750,000, the bank has a lot to lose if you default on your payments. Banks want to make sure that the money they lend you is protected and appraisals are one of the ways they do that.
How an appraisal works
Lenders send in an appraiser after an offer to purchase has been accepted, but before the mortgage is advanced and the Buyer takes possession. The appraiser will physically go to the house and compare it to recent sales in the surrounding neighbourhood. The Big 5 banks tend to pay for appraisals, while many smaller lenders charge their clients the $400-500 for the appraisal.
Warning: We’re seeing more conservative appraisals for condos these days, and more nervousness around houses that sell for significantly over-asking.
Good to know: The goal of a bank appraisal is to justify how much a Buyer has offered, not determine the true value of a home. Appraisals will never come in over the agreed-to price. If you got a deal, don’t expect the bank appraisal to come in higher than what you offered.
What happens if the bank appraisal comes in at less than what you offered?
Unfortunately, sometimes, the bank’s appraiser doesn’t think a home is worth what a Buyer and Seller agreed it was worth.
For example: a Buyer offers $799,000 for a house and a bank appraiser thinks that house is only worth $779,000. The bank will now only approve a mortgage on a value of $779K, which means the Buyer will have to fund the $20,000 difference themselves. This is especially problematic for Buyers with 5% down payments as they may not longer qualify for the mortgage. And if you only have a 20% downpayment, it could also mean having to pay CMHC insurance as your $160K deposit is now only really $140K (with the other $20K paying the difference in appraised value).
In these circumstances, a Buyer has a 2 options:
- Find another lender who sends in another appraiser and hope that the second appraisal value comes in at what you offered.
- Come up with the $$$ for the difference. Beg, (don’t steal) or borrow the funds to make up the difference.
How can you protect yourself from low bank appraisals?
There are a few things you can do to protect yourself from a low bank appraisal:
- Make sure your REALTOR takes an active role in educating the appraiser and directing him/her to recent comparable sales. They may be able to help persuade the appraiser’s opinion.
- Have a financing condition and insist that your lender performs the appraisal during the conditional period. It’s never fun to find out the week before you take possession that the bank’s appraiser doesn’t think your house is worth what you offered and that you need to come up with more money. Better to know your options when you still have time to make alternative arrangements.
- Don’t over-pay for the home in the first place. The bank’s appraisers are going to be looking at the same comparable sales as you and your REALTOR – make sure you truly understand how the home compares to recent sales in the immediate neighbourhood.
- Have a contingency fund. There are hundreds of reasons why you should have available cash and/or credit available when buying a home – trust me, there are always unexpected costs. If the bank appraiser under-estimates what the house is worth by $5,000, your least stressful option is to make sure you have access to extra money to fund the difference. And remember to never borrow as much as a lender is willing to give you! (Unless you want to be a slave to your mortgage.)
The good news:
In the last 50 sales we’ve completed, we’ve only had ONE appraisal come in under what our client offered, and our Buyer was able to secure the full financing from another lender who’s appraiser’s opinions matched the offer price.