Appraisals: How Do They Play into Buying a Home?

Appraisals: How Do They Play into Buying a Home?

The Canadian real estate market has been experiencing fluctuations, and Vancouver Island is no exception. Additionally, the federal government continues to implement mortgage rule changes to address the heated real estate markets, including adjustments to how appraisals are conducted. In Vancouver Island Real Estate, appraisals have become a common aspect of almost every home purchase, given the disparity between values and purchase prices.

Who Orders Appraisals?
If you're financing your home purchase, it's likely that your lender will require an appraisal. Previously, lenders typically requested appraisals for conventional mortgages or those with a down payment of 20% or less. However, in faster paced markets like on Vancouver Island where the relationship between value and price may not align, lenders seek to safeguard their investments by ensuring accurate assessments of property worth.

But What Does Value Mean?
Fair market value is defined as the highest estimated price that a buyer would pay and a seller would accept for a property in an open and competitive market, considering reasonable exposure to that market.

We have seen over the past years that properties often sell for amounts exceeding their listing prices within days, sometimes hours. Consequently, lenders are increasingly demanding appraisals for most, if not all, of their mortgages. While purchase prices and fair market values may differ, lenders must verify that values are substantiated.

Appraisers Have Their Work Cut Out for Them
Navigating this dynamic market presents challenges for appraisers as well. Typically, appraisers rely on "pending" or "sold" properties from the last 90 days as comparables to determine value. However, with the real estate market evolving daily, a home's purchase price may surpass the values of comparable properties.

Appraisers endeavor to address this discrepancy by selecting homes with similar features to the one being purchased and methodically comparing them to determine a reliable value. They then furnish a written report to the lender, outlining their assessment.

What Happens When the Appraisal is Lower Than the Purchase Price?
You have options! Assuming you are still within your conditional (subject) period, you can ask the seller to re-negotiate the price (*this really depends on how competitive the offer situation is, whether you want to make this request), or you can walk away (assuming you have a subject to financing in your offer!). You can also decide to cover the shortfall in value with a higher down payment, independently of making any changes to the offer with the seller.

In essence, appraisals serve as a crucial tool in ensuring that the purchase price aligns with the property's true value, providing lenders and buyers with confidence in their investment decisions amidst a dynamic real estate landscape.

- Amy Francoeur