Appraisal value is lower than the purchase price – what does it mean for you?

We’ve already got used to the fact that appraisal valuations don’t seem to fall short over the previous years. On the contrary, they tend to reflect the purchase price or even exceed it, supported by the pandemic-caused madness over housing.

However, since February, we can see the situation changing, as the real estate markets are balancing out across Canada. Realtors report far more listings than before, which means the supply issue we thought would never disappear suddenly weakens.

Growing inflation and sharply rising interest rates have cooled off the national housing market.

Today, people start facing situations where properties appraise for less than their agreed purchase price.

Can a low appraisal value crumb the deal?

Not always. In case the only issue in the appraisal report is the price, the buyer may just cover the difference and the deal is completed.

Nevertheless, there could be other points of concern in the appraisal report, e.g.:

• Structural or mould issues.
• A short economic life of the real estate.
• A below-average property’s condition.

Such issues (and many other) really can kill your mortgage lender’s interest in your purchase, regardless of the valuation.

What if your offer is firm and doesn’t have a condition of financing?

In this case, you must complete your purchase at the agreed price. If the appraisal is low, but the property’s other characteristics meet the requirements, your lender will probably offer you a mortgage. Unfortunately, it may not be as large as you hoped.

For instance, you agree to buy firm for $1,000,000, and you are ready to put down 20%, or $200,000. However, the property appraises at only $900,000. As a result, your lender offers you a mortgage for only $720,000, which is 80% of the appraised value. It means you will have to put down $280,000 to complete the purchase price of $1 million, which is an extra $80,000 for you.

Can a pre-approval protect you if the appraisal is light?

No. Your pre-approval is not a guarantee you will get the exact amount noted in your pre-approval certificate. It only means that you may qualify for mortgage up to a certain amount, provided all the requirements are fulfilled.

It’s about you and your personal guarantee. The pre-approval certificate doesn’t include any property-specific information, so it has nothing to do with your low appraisal.

What if your mortgage is high-ratio?

As a rule, a high-ratio mortgage (default-insured purchase) can be approved without an appraisal. Nevertheless, the insurer (Canada Guaranty, Sagen or CMHC) may demand an appraisal before issuing a commitment.

In this case, your broker will not get a copy of this appraisal, but they will be told whether the valuation is low or right, and will share this information with you.

If you have a financing clause in your offer, then a low appraisal will provide you a possibility to choose what to do next: you may reduce your offer price, withdraw the offer at all, or cover the difference and complete the purchase.

Can you dispute the appraiser’s report?

People don’t like being second-guessed. Appraisers do it for a living. They are licensed professionals, who know what they are doing. In most cases, the dispute will not lead to any changes.

Yes, there are some cases when, based on respect and understanding, the communication with appraisers do lead to certain changes, but it happens not very often so better not to rely on it.

Sometimes, mortgage brokers can ask the appraiser not to send the report to the lender until they review it, which could be followed by a debate or even asking a second appraisal company for their report.

Can you include a condition of appraisal clause into your offer?

Yes, including one condition called “subject to appraisal” could be reasonable. It shows the seller you are not worried about getting a mortgage, and combined with your deposit and a closing date, makes your offer quite strong.

Moreover, it gives you a possibility to withdraw an offer after an appraisal without problems.

Conclusion

Now it’s time to show even more caution when purchasing a property. Make sure you’ve worked through a strategy so that if your appraisal falls short, it will not destroy your budget or kill the deal.

Don’t forget to include a few conditions in your purchase offer, like we used to do when the market was more balanced. It’s the first time in several years, that you have time to make a well-considered decision.

No one can’t say for sure whether it’s only a temporary slowdown or we are really moving towards a long-term correction (prices decline). Anyway, it’s a time of opportunities and necessary caution.