How to Bridge the Appraisal Gap in Today’s Real Estate Market

Thursday Aug 19th, 2021

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How to Bridge the Appraisal Gap in Today’s Real Estate Market

If you’re searching for drama, don’t limit yourself to Netflix. Instead, tune in to the real estate market, where the competition among buyers has never been fiercer. And with homes selling for record highs, the appraisal process is receiving more attention than ever. That’s because, in a rapidly appreciating market, a property is more likely to appraise below the sales price—which can lead to major repercussions for both buyers and sellers.

It’s never been more important to understand the appraisal process and the risks involved. It’s also crucial to work with a skilled real estate agent who can guide you to a successful closing without overpaying (if you’re a buyer) or overcompensating (if you’re a seller). Find out how appraisals work—and in some cases, don’t work—in today’s unique real estate environment.

 

APPRAISAL REQUIREMENTS

An appraisal is an objective assessment of a property’s market value. Mortgage lenders use appraisals to lower their risk of loss in the event a buyer defaults on their loan.

In today’s market, the use of an automated valuation model (AVM) is still common. But when a formal appraisal is required, an authorized licensed appraiser will be called upon to analyze the property’s condition and review the value of comparable properties that have recently sold. If you’re applying for a mortgage, be sure to ask your lender about the specific requirements.

APPRAISALS IN A RAPIDLY SHIFTING MARKET

Problems can arise when the appraisal comes in lower than the sales price. And while low appraisals are infrequent, they are more likely to happen in a rapidly appreciating market, like the one we’re experiencing now. That’s because appraisers use comparable sales (commonly referred to as comps) to determine a property’s value. These could include homes that went under contract weeks or even months ago. With home prices rising so quickly, today’s comps may be lagging behind the market’s current reality. Thus, the appraiser may be basing their assessment on stale data, resulting in a low valuation.

According to Kevin Lonsdale, Executive Director of the Canadian National Association of Real Estate Appraisers, the best valuations should be based on “data, not emotion. This emotional process where people are outbidding each other creates a disconnect and that then becomes a comparable six months down the road. It’s very difficult to value properties based on what the market wants to pay for them.”

HOW ARE BUYERS AND SELLERS IMPACTED BY A LOW APPRAISAL?

In a balanced market, a financing condition is a standard inclusion in a home purchase offer. It enables the buyer to make the closing of the transaction dependent on their ability to secure a mortgage. And in many cases, the loan is contingent on a satisfactory appraisal, wherein the value of the property is at or near the purchase price.

But in today’s market, sellers often hold the upper hand because the current demand for homes exceeds the available supply. That’s why many buyers are choosing to exclude the financing condition altogether, as a way to sweeten their offer in a competitive bidding process.

However, this approach can leave a buyer vulnerable if the appraisal comes back lower than expected. Without a financing condition, the buyer will be obligated to come up with enough cash to bridge the gap between the contract price and the appraised value—or be forced to walk away from the transaction and potentially lose their deposit.

It may seem, then, that a buyer carries the sole risk of a low appraisal. However, the sellers will have wasted time and money with little to show for it. And they run the risk that the market may have cooled or interest in their home may have waned by the time they relist.

Sellers should keep this in mind when evaluating offers. The offer price should never be the sole consideration. We weigh a range of factors when advising our clients, including a buyer’s conditions, mortgage qualifications, financial resources, and deposit size, among others.

According to Lonsdale, overheated blind bidding in Canadian real estate means that there is additional pressure on everyone involved in the transaction. With a tight timeline, there’s not always enough time for proper due diligence, putting stress on the transaction and on the buyer and seller involved.

 

MITIGATE YOUR RISK WITH THE BEST REPRESENTATION

You need a master negotiator on your side who has the skills, instincts, and experience to get the deal done...no matter what surprises may pop up along the way. If you’re a buyer, we can help you compete in this unprecedented market—without getting steamrolled. And if you’re a seller, we know how to get top dollar for your home while minimizing hassle and stress. Contact us today to schedule a complimentary consultation.

Joy Ho is a full time real estate agent at RE/MAX Finest Realty in Kingston ON, with ability in English, Mandarin, level B French, and beginner Japanese. She moved to Canada in 2009 and has lived at different provinces from coast to coast before calling Kingston her permanent home. As a military spouse, Joy understands the stress and challenges families face with relocation.

Joy’s previous background in Consulting, Marketing, Property Management, and Human Resources demonstrates her well-rounded ability in assisting clients to reach their various goals.

Joy is a patient listener and ready to provide fast response to clients with unique real estate requirements. Real estate transactions include a series of complex tasks. With Joy’s professional experience, she can help her clients to achieve maximum return on their investment.

Home purchase is a significant investment for most people. Finding the right agent is truly essential to help you navigate today’s dynamic and fast-paced market. Find your home with Joy at 613-222-6569.


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