Bidding wars for Vancouver real estate can have unintended consequences if a buyer offers more than the property's appraised value. I haven't had appraisals fall short for purchases (with the exception of one private sale), but in some competitive bidding situations, it could happen.
For conventional deals, most lenders will request an appraisal. If this happens -- in B.C. it typically costs the buyer between $250 and $350 -- and the appointed appraiser determines that the property is worth less than purchase price you offered, the lender will not finance the full purchase price you offered.
You may have to make up the difference in cash even if you were pre-approved for the amount you offered. Let's say you were pre-approved for $600,000 and fell in love with a townhome in Vancouver, so you offered $580,000, which was above the listed price. (I encourage my clients not to buy at the top of their budget because they may want wiggle room for unexpected expenses or lifestyle choices.)
But after looking at the home and at comparable properties, the appointed appraiser determined that the property is worth $570,000, not the $580,000 you offered. You'd planned to put down five per cent ($29,000), which would mean you'd need to borrow $551,000 and pay for mortgage insurance since your down payment is less than 20 per cent. But even though you're pre-approved for $600,000, your lender wouldn't lend the $551,000 you need for this property because the appraised value isn't high enough.
In this scenario, you'd have a few options:
- Dispute the appraisal. If you feel the appraiser overlooked some aspect of the property (for instance, maybe the comparable properties lacked some nicer features that this townhome has), your broker can dispute the appraisal, explain why it's worth more. and ask them to take another look.
- Pay the difference from your own funds. Example: The lender is only giving you 95 per cent of $570 000; if your purchase price is more, you would need to increase your down payment by another $10,000.
- Walk away from the property. If you haven't yet removed financing contingencies, you could continue shopping for other homes that will appraise to their purchase price. Alternately, you and your real estate agent could try working to reduce the purchase price based on the appraised value.
Appraisals for purchases don't generally come in lower than what the buyer offered, but appraisals for refinances sometimes do, because everyone thinks their home is worth more than it is. Obviously, it wouldn't make sense to walk away from a home you already own, but if you're trying to refinance and your appraisal comes in lower than expected, you could dispute the appraisal or make a lump-sum payment to increase your equity in the home.
Many owners doing a refinance want to take out equity so they won't have extra money to put in. In that case, they could wait until property prices go up and they've built up more equity through mortgage payments.
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