Last week I talked about home appraisals, how are the appraisals done, what do they cost and who pays for it, if you missed this post, don’t worry, just click Home Appraisals. So now that you have some basic information about appraisals, we need to take a look at a scenario that can and has happened and what your options are. The scenario I’m referring to is if your appraisal (value of the property) comes in lower then what you purchased the home for.
This can happen when:
- you’ve gotten carried away on an offer night with multiple bids
- not enough comparables to show true value of the property
- banks and insurers confidence in the current market is low
- and really any other situation you can think of
Before you start to panic, don’t! You do have a few options at your disposable……
1. Get A Second Opinion
You can make a request to your bank or mortgage broker that you would like another appraisal done. Most banks and mortgage brokers do have to pick an appraisal company from a preferred list, but it’s worth a shot. Don’t be surprised if you have to pick up the tab for the this second appraisal. Also if your appraisal was done either through the AVM or drive by method, you could request for a full appraisal to be done on the property, so that the appraiser can see the physical property, the condition inside and outside and any upgrades that have been done and have been overlooked on the initial appraisal. This did happen to me and when I requested a full appraisal, the appraised value coincided with the purchase price, boy was I happy!
2. Try A Different Insurer
If you are getting a high ratio mortgage (less then 20% down payment) your lender will be insuring your mortgage with either CMHC or Genworth. Most likely it will be the insurer that requested the appraisal, therefore if your appraisal comes in lower then your purchase price, you can ask your bank or mortgage broker to use another insurer. Unfortunately most lenders use either CMHC or Genworth, so if both your appraisals from either of these insurers come in low then you have to move onto options 3 or 4. Again keep in mind, when requesting another appraisal, you will have to fork out the money for it.
3. Reduce The Purchase Price
If you’ve exhausted options 1 and 2, another option is going back the seller and explaining the situation. Depending on market conditions and sellers motivation to sell, they may be willing to make an adjustment on the agreed upon purchase price to be in line with the value of the appraisal. If so, that’s one awesome seller and you should be very thankful! If the seller doesn’t agree, then you can move onto option 4.
4. Come Up With The Difference
You’ve tried options 1through3 and have not had much success. You have either waived your financing condition, didn’t put one in the offer or want the property really bad, then you will have to come up with the cold, hard cash for the difference. Lets do an example to truly understand what this means:
Purchase Price: $550,000
5% Down Payment: $27,500
Appraised Value of the Property: $520,000
Bank Willing to Lend You: $520,000 minus your down payment ($27,500) + Insurer premium
Shortfall: $30,000 ($550,000 – $520,000)
Money You Will Need: $27,500 (5% down payment) + $30,000 (shortfall) for a total of $57,500 + closing costs….ouch!
What If You Don’t Have That Extra Cash?
If your realtor has put a financing condition in your offer and you do not have the extra cash, then you can inform the seller that you will not be proceeding with the deal. If you have either not put in the financing condition or waived it prior to this knowledge, then you will have to find the extra cash somehow.
Like I said at the beginning, this scenario is not a regular occurrence, but it’s good to be aware of it and know your options. Whenever you can, make sure you have that financing condition in your offer to protect yourself against situations like this. Also if you are heading into a multiple offer scenario, make sure your realtor has done the appropriate neighbourhood research to establish a maximum amount your are willing to offer and try really hard to stick with it….I know, I know, emotions do get in the way!
Has this ever happened to you? If so, what did you do?
Once again, thanks to Mortgage Jake for all the accurate information!