Appraisals are a part of the home buying process. Over the past few years with house prices rising at unprecedented rates, appraisals have played a bigger role in our real estate market.
The short of it is that the bank wants to ensure that the home you have just purchased (and asking for a mortgage) for $400,000 is actually worth $400,000 based on neighbouring sales and comparable properties.
If the home is in a new neighbourhood where there are many similar style homes and many recent sales, appraising the property can be easy as there is a lot of data to choose from, and for the most part all of the homes are selling within a similar price point.
If the home offers something unique, is in a neighbourhood where there hasn't been many recent sales, and in a neighbourhood where house styles vary, an appraiser will have to calculate for adjustments made. What does this mean? Appraisers are taught to add or subtract value based on what the home has or doesn't have compared to the home they are using as a comparable. For example, if the home you are purchasing has 3 bedrooms, but comparable A has 4, the appraiser will make a negative adjustment to the value of your home. Where there can be some ambiguity is for items that carry more subjective value, such as views or locations. Some appraisals come back quite low and some come back even higher than purchase price, depending on how that appraiser values these things.
Appraisers go through several years of education and mentorship before they go off on their own to appraise properties but each appraisal may vary, and what one appraiser determines the value to be may not be the same as another.
What if an appraisal comes in low?
- You will have to come up with the difference between the appraised value and the mortgage value. So if you bought the home at $400,000 but the appraisal came in at $380,000, you will need to come up with that $20,000 difference on closing.
- You can dispute the appraisal and ask for a second appraisal to be done by the same banking institution or from a new bank.
When the market is busy and banks are swamped with applications, sometimes the appraiser doesn't get to the home until days or weeks before closing, and if the appraisal comes in low it doesn't leave the buyers with much time to get the money together in time for closing. Sometimes closing dates needed to be extended to give the buyer time to come up with the difference, sometimes the buyers were not able to and properties were not closing. As of late, banks have been quicker to have the appraisals done but it is still rare to have them completed in the time given for financing conditions.
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