“Congratulations! Your offer is accepted and the house is yours for… Whoops. Not so fast.” We recently saw this happen to a client looking for a home in Burlington.
Both buyer and seller agreed on a price, but because the buyers were planning to put more than 20% down on the home an appraisal was required… And that’s where the fun started. The bank’s appraisal of the home came in lower than the sale price.
Stressed out by the news we approached the seller to renegotiate. Landing on a new price (though still above the appraised value) everyone was happy with the final deal. Our buyers loved the home for its layout, luxury features and upgrades, and precise location within the neighbourhood. It was well within their budget and we had not in our 6 months of searching found such a good match for them. Having watched the market for a year the buyers saw prices rising rapidly in the neighbourhoods they loved, they had lost properties by not jumping quickly enough, thinking price was high and it may come down only to find there always seemed to be a buyer willing to pay. This time, knowing it was a high price, above any recent comparables, they decided they wanted to be the ones to pay that extra bit to secure the home. Luckily, they came up with the money to bridge the distance between the mortgage approved and the final price agreed to. But this isn’t always the case.
What if the bank’s appraisal is 40 or 50 thousand dollars less (It happens!) than the accepted price? Now the buyers now have to either:
1. Scramble to find the money elsewhere
2. Dip into their down payment savings
3. Possibly pay a costly insurance fee because they may no longer have the 20% down
4. Find another home
How can this happen? Well, we have observed that on occasion the formula used for these appraisals is a bit limited.
Sometimes it seems certain elements that carry great weight for a buyer are not weighed as heavily by the appraiser.
Renovations or Improvements
Sellers are often frustrated by this. They spend thousands of dollars and weekends at Rona in the name of home improvement, without seeing their investment reflected fully in the appraised price of the home.
Meanwhile some buyers are willing to pay a great deal to have everything done for them. Not every marriage will survive a renovation!
I just need this house now!
Appraisals also don’t account for convenience. Some buyers find themselves needing a home tomorrow. A new job, baby on the way or any other change in life circumstances will often increase the motivation of the buyer. There is value in a home being ready to move into. This is understandably difficult for an appraiser to quantify.
The Home Specific Location
Again, their formula looks at the neighbourhood- but not the house’s specific position in that neighbourhood.
Appraisers may account for large and well known location drawbacks for residential homes such as hydro lines, train tracks, a busy street etc. But it’s impossible for them to assess the value in more specific details such as the position of a home within a neighbourhood. For some buyers the value of being within walking distance of a public school is thousands and thousands of dollars, while for others driving to the park or school is just fine.
The pretty pictures of the last sale on the street.
The last house on either street looked great in the photos but I know it smelled like smoke! Comparables are chosen based on the information detailed in the MLS listing. That means there is a good possibility that the appraiser is unaware of a home’s negative features. Factors like an old roof, a musty basement or a crack in the foundation can’t be found in an MLS listing, but there is a strong probability they negatively affected the sale price of the comparable property.
A house has wow factor when it has everything the buyer wants, in a way that exceeds their expectation. When this happens, the buyer wants it tomorrow. They cancel every other viewing they have scheduled, because they must have this house.
The appraisal formula doesn’t factor this in. And to be fair, how could it? But as a result, this can lead to a disparity in perceived value.
The momentum of the market
Of course as realtors we are always watching the market. But, buyers are too. They often get in touch with us close to a year before they end up buying. In that time they are receiving new listings and going to see homes of interest. They quickly become experts on a given area. When it is their turn to buy they understand where prices were a year ago, where they are today and where they are probably heading if they wait another 4 months to purchase. As a result, a buyer when confronted with the perfect home may agree to a purchase price that appears high but is in fact an anticipation of where prices are expected to head. Appraisers account for some increase in value over time, but will generally not account for where prices are anticipated to go.
Sure we’re biased. But we think that Realtors are in a better position to assess a property’s actual market value, because we are in daily contact with the buyers and sellers. We know what’s happening today, and can easily look beyond the numbers to predict tomorrow’s trends in the areas we focus on.
Work with a Team That Can Guide You Through This Process
An unfavourable assessment is just one of many complications you may face in finding your dream home. So work with a team that knows how to deal with them and knows the local market.
Your Burlington Neighbourhoods Team will guide you through every step of the process, and show you the best neighbourhoods in Burlington.