Published: May 16, 2017 • Last updated: January 6, 2021 at 7:10 am
Pre-approvals that are too low can be a nightmare for homebuyers!
The ASKROSS hotline received a call on the weekend from a first time buyer in major league stress. His unconditional offer to purchase a new home in Brampton was much higher than any prior sales in the neighbourhood.
When his application was submitted to the mortgage insurer, they insisted on an appraisal. The appraisal came in at $495,000 – Joe’s purchase price was $551,000 !! The appraisal was too low and this has created a nightmare for Joe.Now matter how you look at it, there is no good news when your appraisal is less than the value of the #mortgage of the house that you dream of buying. Click To Tweet
How did Joe get here, what will happen, and what lessons can we all learn from this awful experience?
Two Sides to The Appraisal Story
Now of course, there are two sides to every story and right now Joe is very upset and looking for a scapegoat. He has placed responsibility for his situation with his real estate agent.
As a first time buyer, all Joe knew was that many of his friends were making tons of money watching their homes grow in value, and he was tried of ‘paying rent towards someone else’s mortgage.’
He found a realtor online and they went out shopping. The home they bid on was listed for only $419,000. Joe says his realtor convinced him he had to go in with a firm offer, no conditions, at much higher than the asking price, if he wanted to win the house.
For quite some time, the Toronto real estate market has favored sellers over buyers. Unnaturally so. The supply of listings in Toronto was so sparse at the time that buying a home was very unpleasant – no chance to put any conditions on an offer if you wanted to win.Having a low appraisal can cause a domino effect on everyone connected with that home purchase. Be careful out there, and take steps to protect yourself. Click To Tweet
I have never been comfortable when my clients buy that way. And VERY uncomfortable when they want my assurance upfront that it will be no problem to get a mortgage.
Why This Appraisal Spells Trouble for Joe
Now in Joe’s case, he is not salaried – he is self employed. He gets paid into a corporation and he pays himself modestly in an effort to reduce income taxes. So even if the home had appraised for $551,000 Joe was always going to have a problem qualifying for a mortgage.
And he only has a minimal down payment – he pretty much chewed up all his savings with his deposit.
To make this work, he will need to come up with the difference of $56,000 – where will that come from? And even if he does come up with the extra money, he will have overpaid substantially. Joe should never have made an offer in the first place – let alone one with no condition of financing clause.
And if he cannot come up with the money, this spells trouble for Joe, trouble for the people he is buying from, and perhaps a domino effect on all the home sellers connected to Joe’s purchase.
Joe is worried he might lose his $30,000 deposit. But it will probably be much worse than that. The sellers will have to relist their property and once it sells, they may come after Joe for the difference between what they sell it for and $551,000. And maybe other homeowners in the daisy chain will launch law suits – some of which may spatter onto Joe.
So no matter how you look at things, there is no good news in Joe’s story. This can happen to anyone, not just an unsuspecting first time buyer. Before you make an offer:
- You need to be sure how much mortgage financing you will qualify for
- You need great comfort that the price you propose to pay will be supported by prior completed sales
- Current listing prices or home sales that have not closed don’t count to an appraiser
- And of course, you need a good sense of the condition of your new home. Whatever happened to pre purchase home inspections??