Imagine going off to finalize the purchase your first home, which you love, and the price is right. You sign the purchase agreement, head over to see your lender, who states they will get the home appraised and get back to you. The next thing you hear, the appraiser has come back and has valued the home at $30,000 less than the price you agreed to pay, and to make matters worse, the bank will only authorize a mortgage amount based on that appraisal. However, you signed an agreement stating you’d pay the higher price. It can throw the whole process into turmoil, as well as your nerves. Sadly, this does happen on occasion, and it’s only natural for people to be confused over the price difference between an appraisal done by the realtor, and the appraisal commissioned by a lender. Occasionally, the difference is dramatic enough to halt the mortgage approval process, prompt price renegotiations, or cause the parties to back out of the deal altogether. To gain a better understanding of how this all works, here’s a closer look at appraisals and what you need to know.
How does the Realtor fit into the appraisal process?
The initial appraisal is usually done by the listing agent, who conducts what’s called a comparative market analysis (CMA). This CMA is a standard part of the agent’s preparation for listing a property, and they will look at the condition of the home as well as sale prices of similar houses in the area to come up with that figure. The seller can accept or refuse the suggested selling price, or decide to hire an external appraiser if they aren’t happy. Naturally, the realtor has the seller’s interests at heart, so it’s not uncommon that their appraised price will be on the higher end. It also gives them some wiggle room for negotiating.
A lender’s role in home appraisals
Since many mortgage application require a home appraisal in order to get approved, the lender or mortgage broker commissions a certified appraiser to give them an appraisal value. This way, they know that their investment is going to be protected, and they aren’t loaning money for an inflated or overpriced home that the buyers could possibly default on. Even though you, the buyer, are their “customer”, they ultimately need to ensure there is as little risk as possible. It’s also important to note that appraisals are not to be confused with the property tax assessments, which place a value on each property for municipal and provincial taxation planning – to ensure that each property owner pays their fair share of their property taxes relative to other property owners, based on their property values.
How the appraisers come up with those figures
The appraiser’s job is to give a fully unbiased and impartial opinion of the home’s value – for that exact period in time. We all know how hot and cold the real estate market can be, so it makes sense that outdated or projected data would not be used for a significant asset like a house. During their analysis, an appraiser will review all factors affecting the value of a home such as its condition, location, size, and recent sale prices of comparable properties. They also consider elements like the number of bedrooms and bathrooms, age of the home, quality of home finishes, construction materials, and square footage. Finally, they may also consider the “appeal” of a home based on proximity to schools, green space, waterfront, local amenities, or traffic in that area. Using various calculations, they come up with their appraisal figure.
Don’t get down if the appraisal is low
In some instances, appraisers can make errors, or simply not conduct a thorough enough analysis. For example, there may be situations where the most recent home sales in that area were well below cost because of long-term neglect of the home, marriage breakdown, death in the family, or other unexpected circumstances. Perhaps the appraiser didn’t inspect a newly finished basement or notice a spectacular view. If they don’t have enough data to work with, it can end up being a case of good old- fashioned bad luck. If this does happen to you, there are a few solid options to consider:
- Appeal the appraisal – but be warned that it can be expensive and time-consuming
- Order a second appraisal – also expensive and may not be accepted by your lender
- Negotiate with the seller & agent and meet in the middle for a new price
- Walk away – and find something else just as perfect (but make sure you understand any potential penalties)
As a buyer, getting an appraisal back that is valued at less than the list price isn’t always a bad thing. You’ll have a better understanding of whether or not you are getting a fair price, and it may offer the possibility to negotiate accordingly.
As an experienced mortgage broker, I know the ins and outs of every step in the mortgage process, including appraisals. If you have any questions about applying for a mortgage loan or the various options available to you, please give me a call at 705-315-0516. I am always happy to help you better understand your finances and to help you get the keys to your dream home.