Buyers need a real estate expert in their corner

April 20, 2012

A very interesting story by Garry Marr in the April 18 edition of the Financial Post. According to Marr, some home appraisals are coming in below purchases price on some deals. This has the potential to scuttle some real estate sales transactions, forcing buyers to look for other sources of capital to cover the shortfall, or, in the worst case, to lose a deposit.
This will impact mortgaged buyers pondering a bidding war, forcing them to first consider whether or not the bank will agree with how much they paid for the home.
According to Vince Gaetano, a principal at Monster Mortgage: "This is happening all the time. People are having to come up with more [cash] and, if they can't, they better come up with an alternative means of financing."
Problems arise when a consumer bids above the precedent for the area. A home may be purchased for say $450,000 but the appraiser could say you jumped the gun on values in the area and your new house is only worth $400,000. At 95% debt to equity, the bank will then only give you a loan for $380,000 - meaning you need $70,000 down instead of $20,000.
Marr goes on to explain that it's up to the buyer`s financial institution to decide if it wants an appraisal unless the buyer has less than a 20% down payment, in which case they need mortgage default insurance and an insurer like Canada Mortgage and Housing Corp. takes on the responsibility.
In the same article, Phil Soper, chief executive of Royal LePage Real Estate Services, said appraisals typically can come in a little under purchase price.
"If you look at numbers that come out of the professional appraisals book of business, they are risk adjusted because their principal clients are looking at a way to measure risk," Soper said.
Soper said the impression may be that appraisers have gotten tougher, but he chalks it up to the rate of price appreciation slowing. As the rate of price appreciation falls, appraised values will follow.
"Appraisers don't want to get caught overvaluing a property," he said. "A change in market can make appraisers hyper sensitive to a change in market conditions."
The message to consumers is to tread carefully when they make an offer and make it conditional on financing.
"What is at risk is you could lose your deposit," Soper said, adding the vendor doesn't really want to sell to somebody who doesn't have the capacity to follow through on any deal. "Most people do have some wiggle room though."
There are many lessons to be learned. Customers who get pre-approved for mortgages are told the banks lend money based on the home buyers' credit strength but loans are also based on the property. As well, it important for buyers to have a real estate professional in their corner when negotiating a purchase. Market knowledge is indispensible.