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Bank appraisals have been a normal part of the real estate process for many, many years. They are also one of the most important parts of processing for your lender.
Let’s face it – you may have offered $950,000 for the home of your dreams, but if that home is really only worth $900,000, the bank has a lot to lose if you default on your mortgage 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
The appraisal happens after an offer to purchase has been accepted, but before the mortgage is advanced and the Buyer takes possession. Pre-pandemic, appraisers had to visit a property in person in order to determine its value. During COVID, however, appraisers can view a property either virtually (using photos) or in-person.
Appraisers are mandated to use very recent comparables – usually properties that have sold in the last 60 days. Appraisers do not judge a home’s value based on what happened before that, nor do they make predictions of what can happen.
Who pays for an appraisal? This really depends on a few factors, most notably if the appraisal was done by a bank, prime lender, or alternative prime lender. Banks can pick up the cost of appraisals or they can hide this cost in the advance of the mortgage. If a bank gets an “auto valued” appraisal i.e. no appraiser had to visit the property, that’s usually hidden deep in the mortgage commitment and costs $99. If you’re working with a mortgage broker, the good ones always pay for the appraisal (either up-front OR at time of closing).
Good to know: The goal of a bank appraisal is to justify how much a Buyer has agreed to pay for a home, 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. We see this sometimes during highly competitive markets where bidding wars are the norm or when the market shifts downwards rapidly and a lot of sales are still pending and have not been appraised. (like in 2017).
A Buyer offers $950,000 for a house during a bidding war, but the bank appraiser thinks that the house is only worth $900,000. This means that:
- The bank will now only approve a mortgage based on a value of $900,000. So if they were willing to lend you 80% of the value of the home – that now means you’ll get a mortgage of $720,000 instead of $760,000.
- To make up that $40,000 difference, the first thing they’ll do is look at your deposit – so in this example, instead of your $190,000 downpayment, they’ll assume you have a $150,000 downpayment and that the other $40K is making up the difference between what you paid and the appraised value. Because the downpayment is now considered by the bank as 150K – you now have a 16% downpayment and will have to pay CMHC insurance (which is required when your downpayment is less than 20%) and, is ONLY possible if your purchase price is under $999,999.99. Furthermore, going from a 20% downpayment to a CMHC-insured mortgage will make it harder to qualify for the mortgage, and the amortization period will be limited to 25 years. However, it is a way out of this unfortunate situation.
- If your deposit was 5% and the property doesn’t appraise, you may no longer qualify for that mortgage and may have to get creative.
When an appraisal value doesn’t equal how much a Buyer paid for a property, you’ve got a few options:
- Find another lender who sends in another appraiser and hope that the second appraisal value comes in at what you offered.
- Your agent can argue the comparable sales that the appraiser used to determine the value (note: this is rarely successful). This can mean extra costs and fees and is a very hard road to navigate because most lenders won’t budge on value. It’s worth a shot, however.
- Wait. In a rising market, you can wait for new sales to close that will help justify the price you paid, and have the property re-appraised before closing. This only works if you have a relatively long closing period.
- 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. Note that if you’re buying in a competitive market, you may have to sort out your financing in advance of the offer and may not be able to include a financing condition. [Related: How to Win a Bidding War]
- 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.)
- Have a Plan B. Talk to your REALTOR and mortgage broker or bank before you put in an offer and have a backup plan if the property doesn’t appraise. In a fast-rising market, Buyers pay more for a home than the last comparable sale – that’s what makes it a rising market. Sometimes it takes banks and the appraisers time to catch up with what’s happening in the market.
Related: First Time Buyers Guide – Everything You Need to Know
Ben Goheen says:
I found the “good to know” paragraph very interesting. Here in the US, an appraisal is an opinion of market value and is not only used to justify the contract price.
In my 12 years as an appraiser, the number of appraisals that come in above the contract price are probably about the same as ones that come in below it.
Brendan Powell says:
Here it depends on for what purpose the appraisal is being done–you can certainly hire an appraiser to give you a market value opinion (e.g. we had two clients who own a condo together who were splitting up and didn’t want to sell). But here when the bank is doing an appraisal–and especially when they are paying for it, which is often–they don’t really care much if you underpaid…they just want to make sure the place is worth at least what you paid so they aren’t exposed.
I am a realtor in Ontario and also did the appraisal course. What buffles me was that appraisers use our own stats example I sold a house today and that will become a stats. I’ve had deals that appraisers said it’s not worth the price because they were using a wrong comparables. They take the subject property and compare it with other property similar but some of the property they compare against were not even comparables because even though you are in the same municipality there are always pockets of streets that is superior than the others. Unfortunately appraisers just take the average so obviously if the appraisal will come short because you can include inferior stats against superior pockets of neighborhood although it is in the same proximity.
Melanie Piche says:
Yea, we’ve had that experience a couple of times too, where the appraiser uses comparables from outside the neighbourhood and skew the results.
Appraisal Course? Becoming a CRA involves taking more than an Appraisal Course……
There was an appraisal done on a home I’m trying to buy. They based it on all of the other similar bungalows in the area, however, this particular home has a legal one bedroom apartment in the basement with a separate entrance. The other bungalows in the area don’t have the apartment in the basement. The appraisal came in 30,000 less than the agreed upon price.
Melanie Piche says:
Unfortunately that happens sometimes…appraisals are pretty subjective. I would recommend sending in another appraiser (you might have to go to a different lender) and see if they come up with the same number! The income apartment would normally add value to the property.
Hi Mark, we find ourselves in a similar situation. The bank just told us today that the appraisal is lower than what we expected, and we have to wave the financing condition by tomorrow. Our closing would be at the end of next month so it is really difficult to make up the difference in such a short time. Do you have any advise for us? Are there any other options? Did you lose your deposit? Thank you for your help.
We had a bank appraisal done on my deceased mother’s home. Is the appraisal result the price we should sell the property for?
Melanie Piche says:
Maybe…but probably not. Bank appraisals usually come in lower than the free market is prepared to pay, though of course, that depends on what’s going on in the market when you list the property. I would suggest you meet with a real estate agent and get their guidance on price!
My fiancé and I are looking a purchasing an old stone farm house and have an appraiser going in today to look at it. How would they compare it to other properties in the area when there are no other stone homes around? There are older farm homes in the area, mostly made of brick or wood siding. The real estate agent told us most homes with similar properties to this one in the area had been selling for 800,000, this home was listed at 699,900 and we offered 650,000 and it was accepted with conditions of course. I’m worried the appraisal will come back too low and we will have to walk away.
If I sell my home and the Purchasers came in firm on the offer with no conditions, do I have to allow them in my home to get an appraisal for a bank or, in this instance, another mortgage lender company?
Melanie Piche says:
It all depends what’s in your agreement of purchase and sale…though it’s to your benefit for the buyer to be able to get financing! If they can’t get an appraisal, they likely can’t get a mortgage, so they might not be able to close on the property..that would be bad news for you.
I’m purchasing a home, and the appraisal just came in at 1.3% below offer price. However, I have a large downpayment – currently sitting at an LTV of 62%. However, a condition on the mortgage approval is that the house be appraised at or above the purchase price (probably a standard boilerplate condition).
Do you think the lower appraisal will be a problem for the bank? Would they recalculate with the new numbers and keep the loan amount the same (since it’ll end up being an LTV of 63% instead), or will they ask me to come up with the 1.3% difference in additional downpayment?
Melanie Piche says:
You’ll need to talk to your bank and your real estate agent…that would be a very unusual condition in the Toronto market, so it’s not something that we come across.
When does the appraisal happen? We have a mortgage clause and thought it should happen before we sign the mortgage papers. My mortgage specialist says appraisal will happen 4 weeks before the closing. Does it make sense?
Brendan Powell says:
When the bank appraisal happens depends on your lender and the circumstances; often the appraisal happens much closer to the closing date, partially because lenders know that buyers shop around—-if they pay for an appraisal too early and the client then changes their mind and goes with another lender, then the bank has have wasted that money and effort.
A financing condition very often (in the Toronto market anyway) lasts from a few days to a week, and so usually isn’t enough time to include the bank appraisal…although it can be enough time to get as much certainty as possible in other respects. It would be a very fast appraisal to be completed and returned to the bank in time to fit into a financing condition, although it can occasionally happen, especially if there is concern about the value vs price paid.
We have put an offer in on a home and the lender asked for an appraisal which we have paid for. Since we paid do we not get a copy of the appraisal? Our broker stated that ‘appraisals belong to the lender even though you paid for it.” How is that right?
Melanie Piche says:
Appraisals aren’t usually shared with the buyer (some lenders pass on the fee to the buyer, while others absorb it(.
I agree! I am in the same situation. If the lender requires it they should pay for it. If I am forced to pay how do I not get a copy of the appraisal? How does the lender own something I paid for?
Can a property be closed while being appraised? My father has been waiting for his house to be sold/closed and the delay has been 3 months now. The lawyer is saying that there are delays with bank/mortgage appraisals.
Melanie Piche says:
Most lenders require the appraisal in order to advance the mortgage funds, so this happens before closing. A 3-month delay for an appraisal is very strange in Toronto – the buyer should certainly talk to their lender and if your father is the seller, I would recommend he talk to his realtor to find out what’s happening – there may be other financing issues happening.
When did the banker put a hard hat on, steel toes, grab their gloves, spend the hours of labor (all climates), as example? Hence, if the banker has never gone to work and worked the long hours, all climates, etc, then how the freak can they begin to understand the actual value of the property especially if its behind in code/standard. You’re guessing. And my guess is as good as, if not better than, yours. p.s., if you thought i was freaking at the mortgage broker, then you are way off, I’m laughing at the real estate agent.