The real estate market in Canada recently has been a little crazy. Since Covid, we have reported the consistently rising costs of housing and the steps that are being taken to combat the issue. As real estate investors, we know how important it is to find the best deal possible. Sometimes getting the best deal means taking risks, but which risks are not worth taking?
“An appraisal is an unbiased professional opinion of a home's value.” (Investopedia). To get a mortgage, the lender will use the appraisal to ensure that the home is valued correctly. If the home is valued for less than the appraisal, the lender will not ordinarily extend to the full cost of the home, leaving the buyer with a difficult decision.
Why won’t a bank extend to more than the appraisal?
When a bank lends you money to buy a home (even when that home is an investment property), they need collateral in case you default on the loan. If the property is worth less than what they’re lending, they have no collateral.
Can I pay the difference?
Yes, a buyer can pay the appraisal gap. There are times when buyers are emotionally invested in a home, or they truly believe that the home’s value will go up, and the buyer will either put the cash in to cover the gap or they’ll negotiate the difference with the seller.
Why wouldn’t the seller lower the price?
A seller may not lower the price of their property for one of two reasons:
They owe more in mortgage costs than the appraisal. Perhaps they purchased the home during an uptick in real estate and are currently selling during a time when homes are not priced as high.
They are selling during a peak and have more than one buyer. In this case, they hope that the bidding war will drive the price up, and the buyer will pay the appraisal gap.
Should I spend more than the property’s appraised price?
In our opinion: no.
The current market is still hot, even though measures are being taken to help cool it off. There are bidding wars happening all across the nation that leave investors with appraisal gaps. The issue with putting more money in than the home is worth is that the market will probably cool off considerably over the next few years.
Unless you can hold on to the property for a decade before selling, you are facing a high risk of losing money on the property. We believe that appraisals are vital for investors and should be adhered to, even if you are paying cash!
If you are interested in learning more about property investing, or if you’d like to get started with investing as part of a partnership, Regalway Homes can help! Get in touch today using our consultation tool (see below).