A newspaper columnist asked me today if I’m still seeing properties fail to appraise for their sale price in rare cases, like we saw a year ago around this time.
It got me thinking about the way appraisals are done with respect to Toronto real estate, and the differences between appraisals on houses and appraisals on condos.
If any of you work for banks, or better yet – in appraisals, feel free to chime in, and if you think I’m out of line with the following, then please tell me…
Last week, I got a phone call from an appraiser, who asked me, “What did the property sell for?”
It was my listing, and he was doing an appraisal for the buyer’s lender, so while I didn’t want the deal to go south (not that it would…), I did take this as opportunity to play around with him and get an answer to a question I’d had for a long time: Do appraisers just appraise at the sale price, or is there any work involved in their jobs?
It depends on whether it’s a house or a condo, as we’ll discuss shortly.
So I asked this gentleman on the phone, “Well, what do you think it’s worth?”
There was a pause, no emotion, and then, “Can you please simply tell me the sale price?”
I asked again, and this time a bit more directly, “Well, you’re the appraiser, right? So what do you think it sold for?”
He then answered, “I don’t have the Agreement of Purchase & Sale in front of me, and I’m just trying to get this thing finished – can you please save me a trip to the office, as a professional courtesy, and tell me what it sold for?”
So I told him.
And that was the last I ever heard of it.
Folks, I really, truly believe that in many of the Toronto condo sales of a simpler nature, the appraisal isn’t really an appraisal; it’s an exercise.
I don’t know how the lenders work from the top down, nor should I. But I would guess that when it comes to some random $400,000 condo, there’s a lot less risk for them than with a $1.1M home that was listed for sale at $849,000.
You might suggest that the condo market will go down before the housing market, and thus I have this backwards.
But it seems that the “appraisals” are a heck of a lot easier when it comes to condos!
I’ve been on these “appraisals” before, and there’s little to them. At least, the ones I’ve been on.
The last one I went on lasted under a minute. The “appraiser,” (and I’m sorry if I put that word in quotes, but if I lift up a weight, I don’t become a “weightlifter”) came into the unit, walked through each room, opened the sliding glass door and closed it, and said, “Okay, I’m good.”
So what is that exercise, exactly?
It’s not an “appraisal,” or at least not by any definition that I know.
My guess is that the lenders are just trying to see that the unit exists, that it’s not mortgage fraud, or that the condo isn’t grossly misrepresented, ie. the listing says it’s a 2-bed, 2-bath, but it’s really a 1-bed, 1-bath.
I think, based on the condo appraisals that I’ve been on, that the process for smaller, cheaper, somewhat “safer” real estate is a lot simpler than for single-family homes, where no two properties are alike.
Then again, there’s always the human-element to the appraisal, as I detailed before on this blog on the only occasion I have EVER seen a condo not appraise.
I dedicated 1,600 words to this once, so let me give you the Coles notes here.
I sold a condo for, I think, $348,000, and the appraiser showed up to do his thing on a miserably cold January day.
He called me out of frustration multiple times to say that he couldn’t find the lockbox, then couldn’t open the lockbox, then he got a parking ticket, and he spilled his coffee while trying to open the lockbox. He complained that he was freezing cold, that he might have got frost-bite trying to open the lockbox!
He was pissy the whole time, and was mad that I didn’t put the lockbox in an area that wouldn’t get cold. Perhaps, like, a sauna…
He appraised the property for $345,000, which I still believe to this day, was because of how mad he was at the weather, and just his day in general.
I called him directly to ask him why he had appraised it at $345,000, and he didn’t give me two seconds on the phone before he hung up.
In the end, my buyer-client went to a different lender, with a different appraiser, and they got the property appraised at $348,000.
So what the hell is the point of an appraisal?
I think that if a lender wants to lend, they’ll lend.
As I said, I’m hardly the CEO of TD Bank here, but I think the appraisal serves as a risk-management tool in assessing which loans to take on, but since they’re done on a case-by-case basis, you’re always going to have human emotion and human error.
In the case of single-family homes in Toronto that sell insanely over-asking, the appraisal process is different than that of condos, and it plays more of an important role, but my point remains: if one lender won’t lend, you can easily find another.
And that’s because if one appraiser doesn’t appraise the property at the sale price, then another will.
I’m sure there are cases of TD losing a deal to RBC based on appraisal, and RBC losing a deal to TD based on appraisal.
If a lender wants to lend, they’ll lend.
As I told the newspaper columnist today, there’s this common misconception that if your property doesn’t appraise for what you paid for it, then you’re in trouble.
Not you’re not. Unless, you think there’s ONE lender out there, and that’s your “good ole’ loyal bank” that you’ve been with since you were a child.
Take the situation of an $849,000 listing that gets 14 offers and sells for $1.1M. Sound crazy to you? Well, it’s not crazy to the person who paid $1.1M, or the buyers behind them that had offers of $1,088,000, $1,075,000, and so on.
So let’s say that they’re pre-approved with CIBC, and CIBC sends out an appraiser who comes back and says the property is worth $1,050,000.
This means, of course, that the buyers have to come up with that $50,000 in cash.
That is the fear that many buyers have, and it’s what most people will tell you is the worst-case scenario when buying a home, unless, you know other letters in the alphabet like TD, and BMO, and RBC…
If CIBC’s appraiser came back with a value of $1,050,000, that’s fine. Don’t worry.
Call your mortgage broker and have him or her call Scotia, and they’ll send out their appraiser. When that appraiser comes back with a value of $1,100,000, then it’s the end of this story, plain and simple.
If that appraiser comes back with $1,070,000, then call TD.
And so on.
Now I’m sure that the market bears, and anybody who works for a bank, will tell me this is problematic, or troublesome, but it’s not.
It’s like dating, really.
You date somebody, you find out it doesn’t work, and you move on.
You try it again, and if you’re not compatible, then you cut ties.
You keep trying until you find “the one.”
And when it comes to lenders, not to sound like a broken records, but if a lender wants to lend, they’ll lend.
If you’re reading this, and you’re a mortgage broker with BMO, then of course you don’t want me to tell people to go to another lender. But what would you do?
Would you come up with that $50,00 difference in cash?
Or would you go to a different lender who will provide a different appraisal?
Perhaps the market bears will suggest that this has the sounds of a “US Style Housing Problem,” but we’re not committing fraud here, nor is there misrepresentation. If three people arrive at three different prices for a home, then what’s wrong with finding the one that works best for you?
So what’s the point of an appraisal?
It all depends on whether you’re a buyer, seller, mortgage broker, bank, or of course, and appraiser.
And if you’re a buyer, all I’m saying is that you do have options.
Nothing is carved in stone.
Especially appraisals; most of them aren’t even done on clipboards anyways…
JoeJohn
at 7:26 am
What is the point of the real estate agent?
What is the point of the home inspector?
What is the point of mortgage broker?
Pick any hat in the real estate agent and you will find both good and bad “professionals.”
Marina
at 7:46 am
Appraisals are a much bigger deal in the US where markets can be way more stagnant, and you can walk away from the house – just mail the keys to the bank.
The bank then only has the house to recoup losses. Fraud is very possible.
In Canada, they bank can go after your wages and assets to recoup any losses. That plus the insane Toronto market makes the appraisal way less important. Honestly, if I`m a lender and a house in Riverdale is appraised for $50K less than it sold for, I wouldn`t give a damn.
Joe Q.
at 10:10 am
I think this is a good point (though it’s important to note that the whole “walk away from the house” thing only holds for some states, not the whole USA). I would add that in addition to the homeowner’s wages and assets, the bank can also go to the CMHC. The value of the home as “security” is less important if there are other forms of “security” as part of the deal.
GettingOld
at 8:21 am
Ya know what’s even more predictable than an appraisal value? A TorontoRealty blog post bashing. Next up, David takes a stab at the letter W. “Whyyyy do they call it double-U”
Kyle
at 11:57 am
I generally find David’s posts to be pretty fair, but in this case I agree there is some unwarranted generalized bashing of Appraisers. To my mind there are good and bad in every profession, to generalize over one bad instance seems a bit far fetched. Also when houses don’t appraise, the Appraiser is only the messenger of bad news. The root problem and the one who actually deserves scorn is the buyer who is trying to over leverage and has bit off more than he can chew. Hint to buyers if you can’t afford to play at the big tables stick to the $5 tables, because you’re causing headaches and real costs for the legitimate market participants.
Gilly
at 9:10 am
I think in the Toronto market appraisers need to be knowledgeable about 1) neighbourhoods, and 2) older homes. We switched our mortgage holder from a broker to our bank (hoping to negotiate a better rate) 6 mos after buying our detached home in midtown Toronto. This was in 1992-93 when house prices had dipped significantly from the late 80s. The bank sent out an appraiser who came back with a number that was lower than our mortgaged amount, let alone the purchase price. My husband muttered that the appraiser must have been from the ‘burbs and not understood location, transit, walkable neighbourhood, generous oak trim throughout the house… Needless to say, the bank ignored the appraiser’s valuation, gave us the new mortgage, and we’ve done well in building our equity (400% I’d estimate, but that’s more than 20 years and we’ve put a lot into the place). Still, we do wonder why the bank sent an appraiser out who seemed to have no experience with older areas of Toronto.
JB
at 2:55 pm
“My husband muttered that the appraiser must have been from the ‘burbs and not understood location, transit, walkable neighbourhood, generous oak trim throughout the house…”
It depends on the comparables chosen… Ideally most would have been in the same neighbourhood with similar transit and similar walkablity, etc”. Most houses of the same era in the same neighbourhood would probably have similar or comparable finishes to oak trim… It’s hard to argue “the market value” of little things like trim and doors…
Ch.T.
at 3:04 pm
I don’t necessarily think that it is this easy. Especially not if we take emotions of a buyer into the equation. Freaking out every day whether or not BMO will appraise the property at the offered value. If not will TD do it? Or CIBC? Or some B lender who will charge higher interest rate, but still…
2 Weeks gone and the property still not appraised at the value they need it to be at… Man, I would not want to be that buyer nor their realtor. And then we haven’t even touched the folks with a high ratio mortgage.
Kyle
at 5:17 pm
I don’t feel bad at all for buyers in this situation. If the house doesn’t appraise and they don’t have enough down to make it work, then chances are they can’t really afford the house at the price they agreed to, and not getting the house could be a blessing in disguise. Who I feel bad for are the sellers who thought they had a firm deal, but through no fault of their own end up having to put their house back on the market when the buyer isn’t able to come up with the financing and which could have knock on effects if the seller already bought another property.
Appraiser
at 11:03 pm
An appraisal is an estimate of market value. It’s best not to think of appraisals as pin-point measures of accuracy, despite their usual presentation in a full appraisal report as a singular value. Real estate doesn’t work that way, and nobody’s that good. A 5% range on value is common even among seasoned appraisers, and is recognized as reasonable by the Appraisal Institute.
Since the financial crisis, Canadian banks have increased the number of files sent for full appraisal by at least 20%.
An appraisal is only part of the data required to approve a loan. Loan to value ratio, credit history, job history, income verification.
Mike
at 12:38 am
Consider yourself lucky, you could have spent a whole whack of money on Google Analytics only to find out that a high percentage of your blog readers were appraisers.
The fact that the appraiser hung up on you tells you all you need to know about this business. I understand that the evaluation given is an opinion an like elbows, everyone has one. But the fact that you can never discuss an opinion with an appraiser speaks to the fact that there is very little hard data that goes into the opinion.
I once had an appraiser from Richmond Hill tell me that Lawrence Park was not in the same league as Forest Hill or Rosedale but more equivalent to Bayview and York Mills. When I pointed out that subway access was an important consideration in valuing the area he told me that people in $5mm+ houses don’t take the subway.
wendy
at 9:23 am
Lawrence Park is not in the same league as Forest Hill or Rosedale
jeff316
at 3:48 pm
Yeah I`d agree that the appraiser`s comparison sounds reasonable.
Mike
at 4:55 pm
A lot in LP is 75X150 (average) about a quarter acre, are similar to large lots in Rosedale and Forest Hill and all sell at in and around the same price of $3mm, Two acre lots at Bayview and Yorkmills sell for $6mm, 50% the price found for building lots in the other three neighborhoods
Walk scores in FH, LP and Rosedale are in around the 70’s whereas the walk scores in the Bayview York Mills area are in the teens early twenties.
Appraiser
at 7:19 am
@ Mike: You wrote: “The fact that the appraiser hung up on you tells you all you need to know about this business.”
You are absolutely correct on that point. The appraiser is not permitted to discuss the report with anyone but their client (the lender).
As for the appraisal report not relying on hard data – have you ever actually read an appraisal report, or even seen one? Most people haven’t, but don’t let that fact cloud YOUR opinion.
Mike
at 9:12 am
As mentioned, I had one done, have the copy of it, went through it and called the appraiser on it. Since I paid for it, I was the client. Not uncommon, is it?
Lender had asked for this specific appraiser.
I also had built my own database of all the houses listed and sold in that price range for the last 5-years, sent that to the appraiser. My model compared lot size, square footage, price, DOM, percentage of asking price and walk score. Houses in the area that were demoed were compared and tracked to uncover price of a building lot and any increase/decrease year over year.
The appraisers response was that appraisal was an “art not a science” and he had to come up with a price that the house could sell in 90-days or less. So he cut the purchase price by 25% and came up with his number.
But I stand by my original point, if your not willing to defend your opinion, is it really worth anything?
Kyle
at 12:08 am
I just have to ask, why would someone who has their own database of 5 yrs (though 4 of those years are probably no longer relevant) of all the sold data for their neighbourhood pay for an appraisal they have no intention of believing in?
Joe Q.
at 10:06 am
Perhaps because another party in the transaction wanted a professional appraisal?
Kyle
at 11:13 am
I am no expert on appraisals, but my understanding is that third party would be the one to contract an Appraiser as they would need/want the report. The cost of the appraisal sometimes gets passed through to the buyer/borrower/owner. I have heard of people getting their own appraisals for things like divorce, inheritance, private transactions, or even just out of curiousity but again I ask why pay for an appraisal you have no intent on being open to?
Mike
at 12:59 pm
I was looking to finance the purchase, house price was just over five million, at those prices you’re not getting a great LTV from the banks, so you need to go to specialty lenders. The lenders agree to fund a certain LTV on the appraised value. In this case it was 65%.
A common requirement of specialty lenders is that you fund their costs, so you pay their legal and other expenses and as such you’re required to get the appraisal from an appraiser of their choosing.
The appraised value comes in a lot lower than the purchase price driving the LTV on the actual home price to 55% which works in the lenders favour as it cuts their risk by 10%, yet they don’t have to lower their rates to match the decrease in risk.
I built the database so that I knew what to pay for the house. At this level you’re not comparing to the condo across the hall or even the house down the street so you have to measure a lot of metrics to compare houses in different areas.
As for being open to the appraisal, I was open to it, I wouldn’t have had a problem with the appraisal if he could at least back it up or defend his opinion
Xing
at 12:14 am
Mike,
Where do you get all the sold data from?
It is not easy to find those data recently, let alone in last few years.
JB
at 11:47 am
“As mentioned, I had one done, have the copy of it, went through it and called the appraiser on it. Since I paid for it, I was the client. Not uncommon, is it?”
You paid for it but you’re not the client. The lender (the person needing / engaging the appraisal) is the client.
“I also had built my own database of all the houses listed and sold in that price range for the last 5-years, sent that to the appraiser. My model compared lot size, square footage, price, DOM, percentage of asking price and walk score. Houses in the area that were demoed were compared and tracked to uncover price of a building lot and any increase/decrease year over year.
The appraisers response was that appraisal was an “art not a science” and he had to come up with a price that the house could sell in 90-days or less. So he cut the purchase price by 25% and came up with his number.”
He’s right. All of that info is unnecessary to the important info, and that is – what has happened (price wise) in the that neighbourhood in the last 90 days…
“But I stand by my original point, if your not willing to defend your opinion, is it really worth anything?”
Will agree with you there…
You’ve simplified condo’s too. I see soo many listings where crooked realtors WAY over-estimate square footage, or include balconies in the living space… Condo appraisals are often done on a PSF range. The guy in your first story who just wanted to know the selling price was probably doing you a favour. If your unit sold for a price that was within his range… he probably was happy to support it even if it was at the top end… If I didn’t know what a unit sold for, I’d likely place it near the bottom of my range to limit liability.
Chroscklh
at 10:19 am
Is hard for Chroscklh to read english sargasm – Appraiser recommend no read report for opinion? HIs reports must be the most bad. Apprais is hard when house worth whatever dual-income couple willing pay. Is funny tho, the Vancouverites always talk assessment “what wuz assessment? I no pay above assessment” but in Toronto – no one care.
condodweller
at 11:28 pm
I think all of this comes back to the question of if similar properties sold for 400k and one property sells for 500k just because of a multiple offer situation is that property really worth 500K. I know David’s answer would be a resounding yes, based on a past article, however I suspect a lender would say no, because if the mortgage went into default on a high LTV property the chances are probably less than even that they can resell it for the same price.
I know banks are very risk averse these days due to high prices and a more than even chance of prices dropping down the road. I would not be surprised if appraisers working for banks are told to value properties x% below fair value to protect themselves. I know of two cases recently where the buyer was pre-approved by the bank for a condo and despite this fact, they were asked to pony up extra cash in order to get the mortgage. This I find extremely unfair to the buyer.
In the end I agree that the appraiser is just part of the risk management process to confirm the house exists, in a reasonable condition to avoid mortgage fraud.
I refinanced my investment property a few years ago with such a low LTV that the lender didn’t even get an appraisal, they just sent someone out to make sure the building was there.
Kenneth
at 7:26 pm
You seem to speculate a lot about appraisals and form opinions without actual knowledge about the field. My advice, buy an appraisal textbook (they’re fairly cheap) and master the material. Asking an appraiser how much your condo is worth? Appraiser’s are liable to give verbal opinions. Are you liable for your opinions? I don’t think so. So go back and hit the books son, before you start talking about things you have no idea about.
Dee
at 11:07 am
This is all great, if you take a MASSIVE assumption that your seller is going to extend, extend, extend the time you need to go through 5-7 business day waits for an appraisal with each lender. I would moreso bank on them telling you to walk and taking one of the next multiple offers waiting in line.
Glenn
at 1:36 am
Thats a little simple.
I guess I don’t expect much more from real estate agent – since your lumping all appraisers into one pile, I can lump all real estate agents into the same pile. You guys don’t know how to fill out a listing to save your lives – so many errors. Do you know the difference between a built-in garage and an attached garage?
I can’t and will not speak fro all appraisers, but when I visit a property, I have already done a background check on the property. I take about 20-25 pictures, all which go into a report that the lender gets
It is a lot of work. If you wish to discuss more, I would be happy to follow up with any questions you might have.