Some people like to say that the true value of anything is determined by what the market will bear. But when buying a home, that’s a very dangerous assumption to make. The Canadian housing market continues to grow and, especially in the hottest markets like Toronto and Vancouver, prices continue to climb.
“In a very competitive seller’s market where you are competing with other buyers,” explains Keith Lancastle, CEO of the Appraisal Institute of Canada, “you might offer $600 thousand for a home when the appraised value is only $550,000.”
If you do, you need to know that the lender will determine the maximum amount of the mortgage on the basis of the appraised value, not the sale price. “As the purchaser, if you are going to close the sale you’re going to have to make up that difference, so the cash to close becomes that much higher. Your financing will cover a maximum of 95 percent of the appraised value.”
In an example like this one, the amount of cash you will need to contribute can go from $27,500 to $77,500 based on the discrepancy between purchase price paid and appraised value.
And there’s good reason why financing is tied to appraised value. Real estate markets and the value of individual properties can change very quickly. If a mortgage goes into default, and the value of the collateral is not sufficient, the consumer, the lender and the financial system all suffer.
Across Canada over 600,000 appraisals were written by AIC members on residential properties in 2014. In every one of these transactions, an appraiser used a sophisticated methodology to find the true value of the property. The goal of the appraisal process is to establish an accurate picture of the supportable value, thus protecting buyers, sellers, and lenders alike.
This is a shortened version of the article “Is Your House Really Worth What You’re Paying?” by D.F. MCCOURT from mediaplanet.com.