Rapidly Rising Home Prices Stimulate Buyers When Appraisals Do Not Match The Sale Price

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A sign for sale outside a house says it sold for above asking price in Ottawa on March 1, 2021.

Justin Tang / The Canadian Press

Home prices are rising so quickly in some parts of Canada that valuations set by appraisers are not keeping pace, putting some buyers and mortgage lenders in a bind.

An appraisal is a key factor when a bank or credit union is deciding how much to lend against a particular home. It’s a snapshot of how much that home is worth at a given point in 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 falling further below 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.

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“We are not, very regularly, able 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 are not hitting the numbers, maybe one in 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 as a 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 And when prices go up quickly, it’s more likely that the best comparable sales were made at prices that were already out of date.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 this more and more 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 based on the number of loan applications passed at higher adjudication levels, there are “more occurrences than it is. product currently on the market ”.

Some assessments are performed only using data maintained by automated models. But most involve an appraiser visiting or entering the home. In today’s market, automated and human approaches “struggle a bit,” Ms. Brown said. And with soaring prices, “we are relying less on the [automated] model.”

One aspect of the real estate frenzy is working in favor of appraisers: an increasing proportion of successful offers without conditions. These sales are considered final more quickly, “so we are getting some fairly recent market data,” Sieb said.

But that same trend is what puts some buyers at risk when a home’s valuation is well below its high asking 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 offering conditional offers in years,” said Davelle Morrison, a broker at 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 expected. “As a potential buyer, then I find myself in a situation where I have to find the shortfall,” said Keith Lancastle, CEO of the Appraisal Institute of Canada, in an interview. “You could find yourself in a very difficult financial situation. “

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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 tapping into their savings 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 are lower, real estate agents and mortgage brokers sometimes urge appraisers to look at 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 requests coming in. “Every day we refuse twice as much as we take because we can’t time.”

Under typical market conditions, discrepancies between selling prices and appraisals are more common in large cities such as Vancouver and Toronto. But with shoppers desperate for more leeway due to the pandemic and remote working gaining 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 such as Prince Edward County, east of Toronto, are experiencing “irrational exuberance,” said Treat Hull, owner and broker at Treat Hull & Associates Ltd. professionals buying second homes or exploiting the net worth accumulated in homes in large cities.

Even in these markets, the gap between current and past prices can be significant. Bob Clarke, a Clarke Muskoka Realty broker who sells 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.

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When he called his appraiser and asked him, “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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