What to Do If Your Home Appraisal Comes in Low: A Guide for Canadian Homeowners

Whether you are buying a home or refinancing your existing one, you will need an appraisal: an expert’s informed opinion of the value of your home. If your appraisal comes in lower than your offer, you will need to make a decision about how to proceed.

What Is a Home Appraisal?

A home appraisal is an objective assessment of the value of your home based on factors like its location, condition, features, and recent sales of similar properties in the area. Home appraisals are conducted by a professional licensed by the Appraisal Institute of Canada (AIC). Depending on the province, they might also require additional certification.

What Is a Home Appraisal For?

There are a few reasons why you might need a home appraisal:

• Mortgage approval: Your lender (usually your bank) needs to see your appraisal to ensure the home is worth the mortgage amount before they approve it.
• Buying and selling: Both buyers and sellers use appraisals to confirm that the price of the house is fair.
• Refinancing: Homeowners looking to refinance or borrow against their equity need an appraisal to verify the updated value of their property.
• Tax assessment disputes: If your assessment for property taxes comes in too high, an appraisal can help settle the dispute.
• Estate and divorce settlements: Property valuations are often needed for these legal matters.

How Is a Home Appraisal Done?

Once you contact a licensed home appraiser, they will make arrangements to visit the property. They assess the home’s condition inside and outside, making note of:

• The property’s location including the neighbourhood, proximity to amenities, and crime rates.
• The condition of the property including factors such as age, structural integrity, and maintenance.
• The size and layout of the home and the number of bedrooms and bathrooms.
• Any upgrades or renovations that have been conducted, including additions and energy-efficient features.
• Supply and demand trends in the residential real estate market.

Following the site visit, the appraiser will research comparable properties to determine a fair market value, and then they will write a report that includes details about the property, a market analysis, and their assessment of the property’s value. The report goes to the lender, who reviews it and decides whether to approve your mortgage.

What Hurts a Home Appraisal?

There are a number of factors that can hurt a home appraisal:

Maintenance Problems

Issues such as peeling paint, a leaking roof, broken fixtures, foundation cracks, water damage, faulty wiring, or an inefficient HVAC system can all harm the valuation of a home, as can outdated features such as worn-out flooring and kitchens and bathrooms that are out of style. Unpermitted additions or poor workmanship can also cause an appraisal to come in lower than the offer.

Market-Related Factors and Unfavourable Comparables

If other homes in the area have sold at below market, that can pull valuations down. Similarly, if there are a lot of distressed sales and foreclosures in your neighbourhood, that will artificially lower an appraisal. Your appraiser might also be using outdated comparables, or there might be limited comparable properties in the area.

Why Might an Appraisal Come in Low?

If your appraisal comes in much lower than your offer, there could be several reasons:

• Market conditions such as fluctuating prices, a slow market, or comparable properties that have sold for lower than they would have in a strong market.
• Errors or omissions in the report, such as incorrect square footage, comparables that are out of date, or upgrades that the appraiser missed.
• Unique property factors such as custom features or an unusual location.

What to Do About a Low Appraisal

If your appraisal comes in low, do not despair! There are time-tested strategies to deal with this situation.

Review the Report for Mistakes

Ask your lender for a copy of the appraisal report. Examine the report to:

• Verify that the appraiser used accurate and recent comparable properties.
• Check if any home improvements or renovations were overlooked.
• Look for factual errors, such as incorrect lot size or missing rooms.

Challenge the Appraisal

If you spot errors or omissions in the report, you or your real estate agent can ask for a Reconsideration of Value (ROV) through the lender. Be prepared with supporting documentation, such as more recent comparable sales or receipts for renovations.

Consider a Second Appraisal

A second appraisal with a different licensed appraiser may yield a different result. You will need the lender’s permission to do this, and of course, the lender may reject the second appraisal; ultimately, it is up to them whether to consider the additional information you provide.

Negotiate with the Buyer/Seller

If your lender is unwilling to reconsider the valuation or accept the second appraisal, that part of the process is over. However, you still have options if you want the sale to go through.

If you are the seller, you can consider lowering the price to match the appraisal or offer to meet the buyer halfway.

If you are the buyer, you can request that the seller reduce the price or negotiate other concessions like covering closing costs.

Increase your Downpayment

The appraised value determines how much the lender is willing to give you. If the appraisal comes in low, they will not lend you the amount you need to cover the selling price. However, you can offset the difference in a few ways:

• Increase your downpayment.
• Bridge the gap with cash if you have the funds available.
• Consider other financing strategies such as a secondary loan, or a private loan or a gift from a family member.

Find Another Lender

Work with a mortgage broker to find a lender willing to accept the purchase price even if your appraisal comes in low. Lenders outside the circle of major banks may be able to offer more flexibility. That usually comes with a higher interest rate so you will need to be careful that your monthly payments will be within your means.

Low Home Appraisal

When an appraisal comes in low, it can be very stressful, but it is not necessarily a deal breaker. Take some deep breaths, add a few days to let the new sink in and then plan your strategy. Review the report, negotiate with the other party, and explore other financing options.

Working with an experienced real estate agent and mortgage broker will help you navigate the process. These professionals have been in this situation before and can help you plan strategy as well as keep you calm and focused. With their assistance, you have the best chance of still closing this deal!