Rapidly rising home prices put buyers in trouble when appraisals don’t match selling price
Home prices are climbing so fast in parts of Canada that valuations set by appraisers are not keeping pace, putting some mortgage buyers and lenders in a bind.
An appraisal is a key factor when a bank or credit union is deciding how much it can lend on a particular home. It’s a snapshot of how much this house is worth at any given time – and a check for exuberance, based on data from recent sales that have been closed.
But with one record sale price after another in many communities, especially in small towns outside of larger urban centers, valuations are increasingly lower than the prices paid. This can leave a funding gap for buyers who rely on mortgages to finance much of the purchase, forcing them to quickly find additional cash to close a deal.
“We are unable, on a very regular basis, to meet the expectations of some of these successful buyers,” said Rick Sieb, owner of Intercity Appraisals Ltd. in Port Coquitlam, British Columbia. “Before COVID, I would say we would have one in 50 [not match up]. I would say that at the moment we may not reach a number out of 10. ”
The challenge for an appraiser valuing a home with a high selling price is to determine if it is part of a market trend or an outlier, and then ground that judgment with hard data. But it can take weeks before the conditions on a sale are lifted, and then 30-90 days before many transactions close. At the start of the pandemic, there were fewer sales to use for comparison. And when prices go up quickly, it’s more likely that the best comparable sales were made at prices that were already out of date.
“We’re seeing more of it now,” said Mary Ellen Brown, senior vice president of personal finance products at Royal Bank of Canada, in an interview. The bank does not track how often appraisals are lower than purchase prices, but depending on the number of loan applications that have reached higher levels of judgment, there are “more and more cases of this. kind in the market ”.
Some assessments are performed only using data from automated models. But most involve an appraiser visiting or entering the house. In today’s market, automated and human approaches “are having a bit of a hard time,” Ms. Brown said. And with soaring prices, “we are relying less on [automated] model.”
One aspect of the housing frenzy is working in favor of appraisers: an increasing proportion of successful offers with no strings attached. These sales are deemed final faster, “so we’re getting some pretty fresh market data,” Sieb said.
But it’s this same trend that puts some buyers at risk when a home’s valuation is much lower than its high selling price. The competition for many homes is so fierce in some cities that the conditions that would normally allow a buyer to opt out are considered anachronisms. “We haven’t had clients making conditional offers in years,” said Davelle Morrison, a broker with Bosley Real Estate Ltd. who works with first-time home buyers and investors in the Greater Toronto Area.
When valuations and prices don’t match, banks and mortgage lenders tailor their loans using valuations and other risk factors, rather than prices, which means a buyer may not be able to match. ‘borrow as much as he planned. “As a potential buyer, then I find myself in a situation where I have to find the shortfall,” Keith Lancastle, CEO of the Appraisal Institute of Canada, said in an interview. “You could find yourself in a very difficult financial situation.”
No RBC mortgage has failed because the borrower was unable to make a down payment, Ms. Brown said. “Maybe they call the family to figure this out. Maybe they are saving money to figure this out. “
Or, in some cases, buyers may turn to private lenders who charge higher interest rates to close the gap.
When appraisals go down, realtors and mortgage brokers sometimes push appraisers to see additional data or push lenders to seek a second opinion. “There’s a lot of pressure on us,” Sieb said, especially with the volume of incoming requests. “On a daily basis, we turn down twice as much as we take because we can’t do it. time.”
Under typical market conditions, discrepancies between selling prices and appraisals are most common in large cities such as Vancouver and Toronto. But with shoppers desperate for more leeway due to the pandemic, and remote working growing in popularity, some of the hottest markets can be found in smaller communities such as Gatineau in Quebec, Barrie and Kingston in Ontario. , as well as Mission and Abbotsford in British Columbia.
Areas like Prince Edward County, east of Toronto, are experiencing “irrational exuberance,” said Treat Hull, owner and broker at Treat Hull & Associates Ltd. professionals who buy second homes or exploit the equity accumulated in homes in large cities.
Even in these markets, the gap between current and past prices can be significant. Bob Clarke, a broker at Clarke Muskoka Realty who deals with luxury homes and cottages north of Toronto, recently estimated that one property would bring in over $ 2 million. Another agent suggested a price of $ 3.5 million. The house sold for $ 3.3 million, Mr. Clarke said.
When he called his assessor and asked, “Am I crazy?” he learned that the appraiser refused to appraise the property, telling the seller that the appraisal and sale price “wouldn’t even start with the same first number. It won’t be close.
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