2020 has started off on a bangin’ note. If you were looking at property late 2019 and didn’t pull the trigger, you’re probably finding yourself in a new galaxy of prices. One of the smartest people I follow on Twitter (and someone who I don’t always get along with, mind you), posted this last night:
So, there you have it. People have gone INSANE in the first two months of 2020 and I can’t figure out why. Interest rates haven’t changed much. Policy got a little teeny bit looser yesterday but that was a brand new change. Why are people (over)paying for properties left-right-and-centre? And if you overpaid for a property and don’t have a Brinks truck to help you, what will happen with your appraisal?
That’s the key message here: the appraisal.
When you buy a property with 20% down or more, you’re going to have to get an appraisal unless the property will “self-appraise”. And, no property asking $799K sold for $1.275M will “self-appraise”. None. So the lender(s) will send out an actual human being who will research the property, research the area, and research the comparables. What did other semi-detached 3 bedroom 3 bathroom homes with no parking sell for in the last 90 days? If they can’t find a comparable it doesn’t matter what your Realtor says, they just can’t. My appraisers are starting to run on fumes trying to get comparables because they don’t look at their business as a one-deal-brings-home-the-bacon. They have to adhere to strict guidelines and rules that each bank sets, otherwise they lose the opportunity of being that bank’s appraiser of choice. A tough line to toe these days, right?
So here’s a primer of Appraisals 2020 and what to do if you’re caught short.
First answer – obvious answer – find the money. I’ll give you an example. A client of mine was going to pay $950,000 for a property that we appraised (before offers!) for $950,000.00. The house sold for? $1.25M. There is absolutely zero rational or comparables that prove that house is “worth” $1.25M (except some will argue it’s worth that because that’s what someone paid for it). Fine. It is. But the appraiser won’t think so so in this case – this person MUST have at least 20% down since the purchase price is over $1M. Depending what the property appraises for, the lender will finance 80% of this value and you have to come up with the difference in cold hard cash. In this case here – if the property was appraised for $950,000 – then 80% of that is $760,000 and the buyer has to then pay another $300,000 PLUS the down payment of $190,000 to close this deal. This is a brutal reality this buyer might find themselves in these days. Seller pro-tip: I hope your buyers are coming in with huge deposits because you WILL win in court if they don’t close the deal. It’s been proven from the 2017 mania.
Second answer – get a second opinion. Try to wait as long as possible to do a second appraisal if your first appraisal falls short. Example above – buyer overpays to $1.25M. Appraisal comes in at $950K. Buyer has 60 days to close. Buyer waits until day 40 (or so) and hopes that another comparable has since sold. If yes – the appraiser can in theory go back and revise their comparables therefore revise the appraisal. Buyer Pro-tip setting a longer closing window on properties where you know in your heart you’re overpaying for is probably a very good idea. It’ll give time for the market to catch up – hopefully.
Third answer – if you purchased a property UNDER $999,999.99, we have my good friends at CMHC, Genworth and Canada Guaranty to fall back on. What do I mean? Here’s a scenario.
Say you paid $999K for a house. It was listed for $699K but you just HAD TO have it. Nobody was going to stop you. You have 20%. You’re feeling like a winner. Oops! Appraisal comes in at …. $925,000. Now what? You don’t have a Brinks truck, and your “second opinion” fell on its face. So what to do? Bite the bullet and take CMHC insurance. Here’s what I mean.
$999K at 20% down = $199, 800 down payment. At 80% financing, the mortgage you’re asking for is $799, 200. If the appraisal falls short and you don’t have enough capital to cover the difference, you can opt in for CMHC insurance and still keep your original mortgage amount at $799,200. You’re going to 1. Pay for CMHC insurance, 2. Get 25- not 30-year amortization and 3. Hope to heck your mortgage broker thought of this before you went crazy and stress-tested you. However, there’s an out here and if you compare being sued vs paying CMHC, I’d say paying CMHC is a much better option. Buyer Pro-tip to buyers: Make SURE you have this conversation with your mortgage broker (you’d have it with me for sure) if you’re going this route.
Fourth answer – this is a long-shot. In some cases, if an appraisal does not hit the mark, if you overpaid and bought over $1M, and you can’t have CMHC to fall back on, and you don’t have a Brinks truck, you might be able to get (very expensive) secondary (or even primary) financing. This is where a private lender will lend you a higher mortgage amount OR a second mortgage to cover the shortfall. Buyer Pro-tip: Before going into the dark web of private financing, please talk to at least TWO mortgage brokers. There might be other options besides paying for more financing. You already paid an arm and a leg for a house, make sure you don’t pay with your other remaining limbs for the financing!
In conclusion – when buying in a market like this – be very careful. I know things move at the speed of light. I know you’ve been looking for 9 months and you’re about to have a baby and your landlord kicked you out and you have to absolutely buy the house because the cookies at the open house smelled so good and you could picture raising a beautiful family there and you can’t wait to play in the backyard and have a glass of wine and….. well I know all that. I see/live/breathe it with you. I also want you to be careful, be smart, and know that there may be options for you if you work with the right people. (me!)
Thanks for reading! All comments welcome (on other social media. I’ve disabled comments here because too many people promise me thousands to work from home. I already work from home! No thanks)