Horror. I would have loved to have seen the look on my face.
I received a phone call from the Mortgage underwriter notifying me the appraised value of my clients home came back at $682,000.
Their purchase price was $740,000 making this a major problem.
At any point, the Mortgage lender or Mortgage Default Insurance company may request a home appraisal. This is something out of the clients control and can make or break the Mortgage approval.
Continue reading this article to discover more about home appraisals, and how the horrific start in this story is resolved …
- What is a home appraisal?
- Why is an appraisal being requested?
- How much do appraisals cost?
- Why is the appraisal important?
- Who conducts the appraisal?
What Is A Home Appraisal?
An appraisal is a comparative report, completed by a licensed and independent third party, to determine the current market value of a home.
The appraisal report compares various properties, that have recently sold in a similar area, property type and property style, against the subject property.
Not all properties are EXACTLY the same. In the appraisal report, the appraiser makes adjustments for various differences in the land and building.
For context, when buyers are shopping for a home, or sellers considering listing their home for sale, they do a less calculated version of appraising each property in the market. Lot size, recent renovations, square footage, garage, etc are all factored in to arrive at “market value”.
Why Is A Home Appraisal Requested?
Either the Mortgage lender or Mortgage Default Insurance company want to verify the value of the property they are lending on or insuring.
Like a three year old child, let’s keep asking “why“?
Protection. Let’s really connect how much money we are speaking about borrowing …usually a Mortgage is hundreds of thousands of dollars. The value of the home is the securitization of the Mortgage. In the unfortunate event of borrower default, the property is sold to recuperate the outstanding Mortgage amount. The lender/insurance company want to ensure the value of the home is supported, with third party data.
Snooping. If a client purchases a foreclosure the lender/insurance company will request an appraisal. Why? The appraisal report include pictures of the homes’ inside. They want to see what condition of the home is, inside and out.
How Much Do Appraisals Cost?
Plan for about $350. If the subject property is $1M+ or outside of City limits, plan for more. Some Mortgage lenders will reimburse the cost of the appraisal after the client takes possession of the home.
Why Is An Appraisal Important?
The Mortgage financing will not be complete unless the appraisal condition is satisfied with the lender and or insurers approval. All other conditions of the Mortgage might be OK, but unless the appraisal condition is satisfied, there is no approval.
The value of the subject property is also important to the buyer! The buyers and the lender/insurer want to ensure the subject property was purchased at or below current market value.
What happens if the appraised value is lower than the purchase price??
RUN! I’m kidding …
Here’s a story …buyers conditionally purchase a home for $450,000 and plan to put 20% down payment. Mortgage is $360,000.
If the appraisal comes back with a value of $440,000 the Mortgage will only be allowed to be 20% of $440,000. In this case, the Mortgage would be $352,000.
So what happens now?
Well, the buyers could negotiate the purchase price lower using the appraisal as a leverage point. Or the buyers could pay the sellers an extra $10,000 so the original sale price of $450,000 is retained.
When appraised values come in at or above the purchase price, we celebrate. When appraised values come back below the purchase price, we correct course accordingly.
When refinancing a Mortgage, the maximum Mortgage amount can only be 80% of the appraised value of the subject property.
Who Conducts The Appraisal?
An appraisal is completed by a licensed appraiser. The Real Estate Council of Alberta (RECA) requires special licensing and minimum standard testing to obtain and retain appraisal credentials.
Conclusion:
Remember my (horrific) story of a purchase value of $740,000 and the appraised value coming back at $682,000?
The subject property was a new home purchased from a builder with a completion date of July 2021. The purchase contract was signed October 2020.
This scenario creates a couple roadblocks for the appraiser …
- The property specifications are detailed in paper, not yet tangible.
- Accessing and comprehending the look and detail of the home (yet to be constructed) is more challenging, relative to a resale home.
- Accessing comparable data of other new build and recently sold homes as relevant data points is also more difficult.
Essentially what happened was this …when appraising new build homes appraisers do not have to use other new build homes as comparables. They can use other resale homes as comparables.
I think we all agree, buyers pay a premium for a new build home. Buyers can customize the home, have the benefit of new home warranty and have a “never lived in home”. I think this is a different market than resale homes.
In our story, the appraiser compared the new home with other resale homes. This created a MAJOR discrepancy in valuation.
I requested the Mortgage lender submit this purchase file to a different Mortgage default insurance company. The plan was to have the new appraiser determine market value using other recent new home sales as comparables.
When speaking with the builder sales rep, he assured me multiple and various new homes have been selling in and around the $740,000 price range. There is a market established; we just need a favourable appraiser to consider different data. And we did.
YOU:
If you’ve read this article and found it helpful, let others know about it. If you like this information, I’m happy to share more information with you, specifically to help with your next Mortgage need. Be sure to reachout.
Other articles of interest might be: Credit (click here) or the Stress Test (click here)
Talk soon,
Chad Moore
403-809-5447
chad@canadamortgagedirect.com
