Wednesday 1 September 2021

"When appraisals go bad"

 You've got your offer in on a property and it was accepted.  Yay!  Now you get to work on fulfilling your conditions, including financing.

Whether through you or your real estate agent, the bank or mortgage broker will want a copy of the Agreement of Purchase and Sale (formal name for the contract often referred to simply as "the offer").  They will enter the transaction into their system and it will go through a number of approval steps behind the scenes.

One of these steps may be a formal value appraisal.  Banks do this to protect themselves from over-financing properties, whether by innocent buyer enthusiasm or by fraudsters looking to make easy cash.  An appraiser has specialized education in real estate value assessment, should have a proper certification, and often is on a list of approved qualified appraisers that the specific lender will accept.

The appraiser's job, in a nutshell, is to look at sale history for the marketplace and determine whether the offered price is reasonable based on that evidence. Appraisers do not "set" the value of a property - it's more like they "uncover" the value, by making adjustments to real sales to account for differences and determine a proper value range.

Of course, you generally don't care how the appraiser comes to the value they come to, as long as it is at least what you have offered.  If it isn't, then you have a problem.

It can be very difficult (if not impossible) to challenge an appraisal value, and the bank will only lend based on what they think a property is worth, so if you have offered $700,000 on a house and they feel it is only worth $550,000, then they will only give you a mortgage based on $550,000.  If you want to continue with the purchase, you will have to come up with the down payment for the $550,000 plus the full $150,000 shortfall.

Where this can really be a problem is if you have made a higher offer to win the purchase in a bidding war and perhaps allowed yourself to also (unwisely?) remove the financing condition to make your offer more attractive, because you are now legally obliged to buy without any easy way to back out.  And that could hurt, with an expensive purchase or a lawsuit if you fail to close.

Some appraisers will deny it but there is sometimes room for judgement calls on adjustments, so you might be able to arrange a mortgage through a different lender who will do their own appraisal, and that new appraisal might come back acceptable. But you'll be stressed out and scrambling, and there is no guarantee another appraisal will make a difference.

Bottom line advice: always try to include a mortgage condition unless you are buying all cash or you are ready to make up any large shortfalls to the financing.

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