Lender Appraisal Must Validate the Price Paid

A Purchase Price May Be Questioned

The seller insisted that he won’t sell his home for less than $143,000. In fact, he stated that he must get $143,000 before he would consider selling it. So the listing salesperson pulls some recent neighbourhood sales that are somewhat similar to the seller’s home that suggest that the seller is not out of line with the price he wants. The home is listed for sale at $149,900.

Final Mortgage Approval May Require an Appraisal

After a couple of months and a number of showings, the seller successfully negotiates an offer for the price he wants. The Offer to Purchase is conditional on the buyer obtaining a mortgage, and with a minimum down payment of 5% of the price, the buyer qualifies for the needed mortgage. Final mortgage approval, however, is conditional on the lender obtaining an appraisal of the property through one of their approved appraisers.

The Appraisal Comes in $5,000 Lower

The appraisal of the home now comes in at $138,000, a sum that’s $5,000 below the purchase price. Given the discrepancy, a lender will approve the amount of mortgage based on the purchase price or the appraised value, whichever is less. This means that the buyer will have to come up with the $5,000 difference, something that the buyer may find hard to do given that he will also need additional funds for home insurance and the legal costs to close the transaction.

Buyer Wants Out of the Deal

As the buyer is already squeezed financially, coming up with the additional $5,000 to cover the difference between the appraised value and the purchase price is a hardship. He cannot remove his condition to obtain a mortgage, the conditional time expires and the buyer asks for a release and return of his deposit. Not to mention that the buyer is now turned off because he feels that at the accepted price he is overpaying.

The Seller Wonders What Just Happened

The seller is bewildered and questions what happened. The listing salesperson calls the appraiser to discuss and to offer some similar sales that seem to support the purchase price. The appraiser refuses to discuss the appraisal, stating that the information is the property of the lender and, therefore, confidential.

The Property is Now Red Flagged

Sellers need to understand that if a similar experience happens to them, a subsequent offer will likely run into the same issue with a down payment of less than 20% as it needs to be insured. The CMHC computer system red flags the property and unless the purchase price is in line with the appraised value noted, the buyer will again have to come up with any difference, and this again might jeopardize the transaction. If possible, the seller’s best option is to reduce the price to avoid a recurrence. 

Eugene Pilato

Eugene Pilato

Broker of Record
CENTURY 21 Today Realty Ltd., Brokerage*
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