When Home Appraisal Values Come Up Short

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Recently, there has been a remarkable rise in appraisal valuations; in some cases, it’s even reached the purchase price or higher.
When Home Appraisal Values Come up Short


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Recently, there has been a remarkable rise in appraisal valuations; in some cases, it’s even reached the purchase price or higher.

However, with the current market trends of rising inflation rates and interest rates, real estate activity is cooling off due to the increased availability of listings. This subsequently leads to situations where appraisals come up lower than their agreed purchase price.

As we’ve observed over the past two years, this hasn’t happened frequently. Yet monitoring these changes is necessary so buyers and sellers can make informed decisions while navigating an ever-evolving real estate landscape.

Does A Low Appraised Value Squash The Transaction?

In some cases, the only discrepancy between the appraisal results and the listing price may require making up a shortfall in funds to complete the transaction.

However, when further warning signs come up in reports, this could significantly reduce lender interest in financing your purchase. 

Warning signs like:

  • structural damage or mould problems
  • below-average condition of the house or
  • a short economic life of the property

Therefore it is important to be aware of what other issues an appraisal report may uncover.

But What Happens If Your Offer Is Firm, With No Condition Of Financing?

If a property you plan to purchase appraises at a lower value than the agreed price, your lender will likely still offer you financing up to 80% of the appraised value. In this situation, you’re expected to come up with the remaining amount in order for the agreement to be completed.

For example:

Suppose you agree to buy a property for $800,000 and are willing to put up $160,000 (20%). But the appraisal has determined that the property is only worth $750,000.

The lender would then offer mortgage financing of $600,000 (80%), leaving you with an extra $200,000 – or an additional $40,000 – that needs to be paid before the deal can be finalized. You are obligated to complete your purchase at the agreed price if there is no condition of financing.

Will A Pre-Approval Protect You If The Appraisal Is Low?

Your pre-approval is not a guarantee you will receive the exact loan amount specified in your pre-approval certificate. Rather, it indicates that you may qualify for mortgage financing up to a certain amount, depending on other factors.

The pre-approval focuses on you and your financial capabilities. It does not take into account property-specific details, which are unknown when searching to purchase a home.

Therefore, should an appraisal come in low after your issued pre-approval, this would not alter the terms of the certification.

What Happens If Your Purchase Is A High-Ratio Transaction? Otherwise Known As An Insured Purchase.

In most cases, a high-ratio mortgage won’t need an appraisal prior to issuance of a commitment from the insurer (Canada Guaranty, Sagen or CMHC). However, verbal appraisal estimates may be shared with you and your broker and the results of this estimate will indicate if the valuation was considered high or adequate.

If financing is included in your offer to purchase and the appraisal comes in lower than expected, it’s possible that you’ll need to reduce your offer price, provide extra funds yourself, or back out of the purchase entirely.

Can You Challenge The Value With The Appraiser?

Appraisers are certified, trained professionals and the assessments they make are based on established criteria. As such, challenging or undoing those opinions should not be taken lightly. Even so, it is possible that politely communicating your point of view may result in some movement on the appraiser’s opinion.

As mortgage brokers, we have the option to request that an appraisal company withhold a report until we can review it ourselves. This provides us with an opportunity to discuss any potential value discrepancies and possibly seek a second opinion if needed.

Can You Add A Condition For An Appraisal?

In certain markets, it may be beneficial to have a single condition in an offer, such as “subject to appraisal.” This conveys that the buyer is serious and confident in obtaining financing. It also gives the buyer an exit strategy if the appraisal results are not what was anticipated.

Ultimately, including this provision can potentially make for a competitive offer by showing lower risk to potential sellers.

Buyers should exercise caution when considering a real estate purchase. It is important to have an established strategy in place in case the appraisal comes in lower than expected.

Negotiations are more likely to succeed if potential buyers make their offer contingent upon certain conditions, something that was rarely considered during previous periods of seller-favoured markets.

For some buyers, this environment spells opportunity; for others, it calls for a cautious approach.

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