If you are in the process of home buying and have your eyes fixed on a house you really like, are you willing to pay any amount to own it? Stop, and think again.
Understanding the value of a property before you buy it is a very important step in your homebuyer journey. A misstep at this point could cost you thousands of dollars in the future.
As a prospective homebuyer in Canada, understanding your home appraisal process is a critical step. Emotional buyers often overlook this step, and it can impact their finances in a big way.
Let’s do a deep dive into what a home appraisal is, its role in the homebuying process and what steps you should take if the appraisal on the property you wish to purchase is lower than expected.
What is a home appraisal?
A home appraisal is an unbiased and professional assessment of a property’s true value. It is a critical part of the mortgage lending process, as it provides assurance to the lender that the property you are going to buy is worth the amount they’re being asked to lend.
Related: Can renovations offset falling home values?
Who requests it and when?
At the mortgage application stage, the lender will request the appraisal after you (the borrower) have made an offer on a home and the offer has been accepted by the seller.
While the lender orders the appraisal, as the borrower, you are responsible for paying the appraisal fee. This is usually a part of your closing cost and can range from $300 to $500 or more, depending on the property’s location and complexity.
Here's a tip: Usually in a buyer’s market situation, buyers can put in a conditional offer, on the condition of financial approval, in which case they can take the offer back if the mortgage application is not accepted by a lender, or the appraisal comes in lower than the selling price.
During seller’s market conditions, where multiple buyers are competing to purchase a property and multiple bids have been offered, sellers have the option to reject a bid that comes in with conditional terms.
The appraisal usually takes place before the lender gives final approval for your mortgage. It’s one of the last steps in the homebuying process and often takes place after the home inspection but before the closing date.
Read more: The hidden costs of buying a home
Factors that determine the value of a home
Appraisers usually consider some common factors when determining a home’s value.
The location: An appraiser will consider the selling price of homes in the same neighborhood, the school district and school rating, and proximity to amenities.
Size and layout of the home: Depending on the number of rooms, renovations, finished or unfinished basement, number of garage and other such facilities, an appraiser will determine the appropriate price for the house.
Age and condition of the home: Appraiser will use a combination of on-site inspection and maintenance, renovation requirement estimates to determine the price.
Recent renovations or upgrades: If the house has a newly renovated roof, upgraded washrooms, landscaped backyard, pot lights, and a finished basement, the value of the home will likely increase.
Comparable sales in the area: Often referred to as “comps”, an appraiser will look at the price your neighbour’s house was sold for recently and take that into account.
Current market trends: Market trends and interest rates can carry significant weight. Lower mortgage rates tend to increase buyer affordability, driving up demand and home values. On the other hand, rising interest rates may cool the market, as affordability shrinks for potential buyers.
Appraisers take these market dynamics into account, evaluating how conditions like economic growth, unemployment rates, and housing inventory trends might influence pricing in your area.
Broker Betsy Wang of the Betsy Wang Team at ReMax Escarpment puts a lot of emphasis on staging your house during the duration of sale, having been in the business for over fifteen years now.
“Staging your home well will give a buyer as well as an appraiser a good idea of what your home is worth. A well-staged house gives a good glimpse of what living in that home would feel like, and that is very important when you are investing in a property,” she says.
Read more: 5 renovations to increase your home’s value and their impact on your home insurance rate
What happens when the appraisal comes in lower than the purchase price?
Sometimes, an appraisal may come in lower than the agreed-upon purchase price after the sales deal has been signed. This can happen for various reasons, such as rapid market changes, bidding wars, overpricing by the sellers, or lack of comparable sales in the area.
Danilo Jokanovic, sales representative at the ReMax Betsy Wang Team, says, “If the appraisal does come in lower, the price difference must be paid by the buyer. This is why you need a real estate professional to do the due diligence and run the numbers before you sign in on any property.”
Jokanovic stresses the need to hire an experienced real estate professional, especially if you are a first-time home buyer, so you stay ahead of the curve, by letting the professional do the research and sales findings for you.
“You may need to make up the difference between the appraised value and purchase price out of pocket and if you can’t cover the difference, the deal might fall through,” he adds.
Jokanovic says while lenders are unlikely to cover the difference, however, if stuck in such a situation, some buyers can explore options like private lenders or vendor takeback mortgages, though these often come with higher interest rates.
“An experienced real estate agent and mortgage broker can guide you through potential appraisal challenges,” broker Wang says.
Real estate professionals are better apprised of the current market trends and can help you make a more realistic offer and anticipate potential appraisal issues.
Related: What’s the “buyer beware” principle when it comes to buying a home?
How to prepare for appraisal challenges?
As a prospective homebuyer in Canada, it is important to understand the role of appraisals in the home buying process. Consider the following to protect yourself:
- Analyze various scenarios, including a low appraisal, and run the numbers on how much additional cash you could have to pay if needed.
- Include an appraisal contingency in your purchase agreement. This clause can protect you if there’s a need for you to exit or renegotiate the sale deal if the appraisal comes in low.
- Do your due diligence before signing any purchase papers. Understand the current market trends and work with your real estate agent and mortgage broker by making a more realistic offer and anticipate appraisal issues.
A home appraisal is not a roadblock in your home ownership journey. It is designed to protect both you and the lender. By spending time understanding the potential challenges, you can navigate your home purchase with confidence and make informed decisions along the way.
Read next: How much are real estate commission rates in Canada?
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