Dealing with Appraisals in Today’s Market? Here’s What You Need to Know

Real estate appraisals can be confusing. They cause headaches for many home buyers and even sellers especially right now.

Why Are Appraisals So Unpredictable?

Home appraisal values are changing a lot lately. Many things can affect the final number. This includes the type of property, condition and, of course, its location is key. Appraisals aren’t just about recent home sales nearby, market trends also play a big part.

More Low Appraisals Are Happening

Because of the current economic uncertainty, more appraisals are coming in lower than the purchase price. These low appraisals can cause big problems.

lets break down how that may look:

Imagine this scenario:

1. Your Purchase Price: You found a home you love and agreed with the seller to buy it for $800,000. This is your Purchase Price.
2. Getting a Mortgage: You need a mortgage from a lender (like a bank). Let’s say you planned to put down $160,000 (20%) and needed a mortgage for the remaining $640,000.
3. The Lender Orders an Appraisal: Before giving you the $640,000 mortgage, the lender hires an independent, licensed appraiser. This appraiser’s job is to figure out the home’s current market value. They look at the house itself (condition, size, features) and what similar homes nearby have actually sold for recently. The lender does this to protect their investment – they want to make sure the house is worth at least the amount they are lending against it.
4. The Appraisal Comes In Low: The appraiser does their work and concludes that the home’s current market value is only $770,000. This is $30,000 less than your $800,000 purchase price.

What Happens Next? (The Consequences)

Because the appraisal came in low, here’s the problem:

• Lender Bases Loan on Lower Value: The lender will now base the mortgage amount on the lower of the two numbers: your purchase price ($800,000) or the appraised value ($770,000). In this case, they use the $770,000 appraised value.
• Mortgage Amount Reduced: If the lender agreed to finance 80% of the value (which is $640,000 based on your purchase price), they will now only finance 80% of the appraised value.
  • 80% of $770,000 = $616,000.
• You Have a Shortfall: You thought you needed a $640,000 mortgage. But the lender will now only approve a mortgage for $616,000.
  • This means you are $24,000 short ($640,000 – $616,000)

What Are Your Options?

When facing this $24,000 shortfall due to the low appraisal, you generally have a few options:

1. Come Up with More Cash: You need to find that extra $24,000 yourself and add it to your original $160,000 down payment. So you’d need $184,000 in cash at closing instead of $160,000.
2. Renegotiate with the Seller: You can go back to the seller, show them the appraisal, and ask them to lower the purchase price to the appraised value ($770,000). If they agree, your original mortgage calculation might work again (80% of $770k = $616k mortgage + $154k down payment). The seller might say no, yes, or offer to meet you partway (e.g., lower the price by $15,000, meaning you only need to find an extra $9,000).
3. Challenge the Appraisal: This is sometimes possible but often difficult. You (usually through your mortgage broker or the lender) would need strong evidence, like recent comparable sales the appraiser missed, to argue the value should be higher. Success isn’t guaranteed.
4. Walk Away (If You Have a Financing Condition): This is crucial. If your Offer to Purchase included a financing condition, and you genuinely cannot secure the needed funds because of this low appraisal, you can likely withdraw from the deal legally and get your deposit back.
5. Walk Away (If You Don’t Have a Condition): If you made a “firm offer” with no financing condition, backing out is very risky. You could lose your deposit and potentially be sued by the seller. This highlights why financing conditions are so important in uncertain markets.

Final Thoughts: Handle Appraisals Smartly

So, be smart about appraisals. Order them early. Use financing conditions and Most importantly, talk to your Realtor and mortgage professional. They can give you the best advice for navigating the current Ontario real estate market.