What Is Home Appraisal And Why Does It Matter In The Toronto Area Housing Market?

You may know what home appraisal is but do you know how the appraisal value is determined? 

 

The term “home appraisal” has different meanings depending on who is doing the appraisal and why. The real estate agent version is called a current market analysis or CMA that is done when a Seller wants to know how much to list their house for. The real estate agent will use MLS to take comparable “for sale” properties as similar as possible to subject property to show the Seller what homes on the market they would be competing with. Then the agent would select comparable “sold” properties that would have sold the most recent preferably within the past 30 days and be as similar as possible.

The agent would also select expired listings of similar properties to show the Seller what is not selling on the market. Although these appraisals are fairly accurate for the purpose of establishing a good listing price it is only as accurate as the experience and quality of the agent and is not acceptable to a bank or lending institution for lending purposes.
 

When you purchase a home, you have to be qualified by the bank to get your mortgage. This means that you would have to supply job letters proving your employment and have a good credit score. Some Buyers think that once approved by the bank all is well. Unfortunately, that sometimes is not the case. The bank does not just qualify you - they also have to qualify the house.
 

This is where an appraisal is done for the by an accredited appraiser and is often called a bank appraisal. The appraiser will only use data on homes that have sold and closed. 
 

An appraiser will visit your home to determine its condition. They’ll conduct both an interior and exterior 

evaluation then compare your property to recent home sales in the area known as “comps” to come up with an appraised value
 

 

The most common type of appraisal for a residential property is the Uniform Residential Appraisal Report. It consists of interior and exterior photos, comparison sales (comps), and a complete cost breakdown of the property, such as square footage, lot size, the number of bedrooms and bathrooms, and any home improvements. This type of appraisal is a blend of both a market and cost approach to determine its fair market value. The cost approach establishes the value of the home by determining what the cost would be to rebuild the structure from the ground up. The value approach determines value using comparison sales in the immediate area that have sold within a recent period of time. The bank will want to know that the home financing they provide can be supported by the collateral, and you’ll want to make sure you’re not paying more than the home is worth, within reason.

Now what happens if the appraisal does not match the purchase price as we often see today in a decreasing market.

Let’s say you buy a house for $1.2 million in February of this year and you are closing at the end June but the market has depreciated since you bought and the bank appraises the house just prior to closing. The appraisal only comes in at $1.1 million, the bank will only lend up to 80% of the value. You anticipated only putting down $240,000 but now you have to put down $320,000.

Coming up with an extra $80,000 can be difficult. In a case like this, I hope you would have friends or family that can help you out or a possible nest egg that you would need to cash in to close. Not closing has dire consequences and something you would need to have legal advice on.
 

In the “up” market, like the last 2 years before the recent downturn, there is always a risk of appraisal coming up short due to overheated market and bidding wars. When you are in such a situation as a buyer, you should have a dependable source of additional funds, if you need them.
 

Also something else to keep in mind is that the bank appraisals tend to be more conservative when it comes to refinancing the existing mortgage or securing a home line of credit.

If you are thinking about selling your home and need help, contact me at 647-834-9928.