Buying a house should be an exciting time. Yes, it’s a big commitment, but it’s also a massive achievement that is well worth celebrating. When you embark on this journey, you have countless details to think about. Perhaps you’re already dreaming of what your new house will look like. In your mind, you’re hanging pictures and picking out the furniture. However, you must first find the right home before any of that can happen. 

A successful house hunt and purchase begins with preliminary research, and you want to know what you’re getting into legally and financially. One topic that doesn’t get nearly as much attention as it should is the bank appraisal. What does this mean, and why is it so critical to understand before buying a house? 

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What’s a House Worth?

From a seller’s perspective, a house is worth as much as someone is willing to pay for it. Perceived value is everything. That’s why homeowners invest so much time and money to make a house look stunning before listing it for sale. The better it looks, the higher the final price will be. 

But for the buyer, it can get more complicated. The value of a house can fluctuate depending on how competitive the market is. When facing multiple offers, you sometimes have to offer more than the seller’s asking price. Unfortunately, for the buyer, what you pay isn’t always what the house is worth. In a hectic market, it is easy to overpay.

Want to know how I can help you buy your new home? Find out more about my process below:

Fair Market Value Defined

What does fair market value mean? The Canadian Revenue Agency defines it like this: “The highest price a property would bring, in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.”

In plain English, this means the fair market value will be determined by the mutually agreed-upon price where no undue stress or compulsion exists. 

  • In a balanced market, the selling price is likely going to be at or near fair market value because there are no outside factors or stress involving your decision.
  • In a buyer’s market, you might pay less than fair market value if the seller is highly motivated to sell.
  • In a seller’s market, you could pay above fair market value, especially if you get caught up in multiple offers and bidding wars.

Home Evaluation Vs Bank Appraisal: What’s the Difference?

Many real estate agents (myself included) offer free home evaluations to their clients. We perform a service called a CMA (Comparative Market Analysis) to determine how much we believe a home will sell for in the current market. How do we arrive at this estimate? We take a look at how much similar properties have sold for recently. We also factor in the size of the house, how many bedrooms and bathrooms, lot size, and any recent updates. The idea of a CMA is to give a homeowner a starting price when listing a property for sale.

An appraisal is similar, except it is performed by a licensed appraiser on behalf of the lender rather than the real estate agent. When you place an offer on a home, the bank orders an appraisal before approving your mortgage to ensure they are not lending you more than the house is worth.

How a Bank Appraisal Can Affect Your Financing

Imagine you find a home that you feel you absolutely must have. You can’t bear the thought of missing out, so you offer $1 million right out of the gate. To your delight, the seller accepts. But before you begin your celebration, there’s something you have to know. The bank appraisal can put an unexpected snag in the process if they disagree that the home is worth $1 million. They will not approve your loan for more than fair market value. This could mean you end up with a shortfall in your financing and will have to come up with the difference through other means.

It doesn’t help that the appraisal takes place after your offer is accepted but before the lender finalizes your loan. What can you do to ensure you don’t find yourself on the hook for a purchase you can’t get financing for? 

The safest way to proceed is to put a condition of financing on your offer. This allows you to back out of the transaction if the bank rejects your loan or doesn’t cover enough of the purchase price. If you’re not in competition, this is likely your best approach.

Wondering how to purchase a home in the different types of markets? Here’s How to Make Your Offer Stand Out.

Protecting Yourself In Competitive Situations

If other buyers also have their eyes on the listing, adding conditions can hurt your chances of winning the bid. Luckily, there are other ways to protect yourself.

  • Work with a mortgage broker who can give you access to multiple lenders. 
  • Put a ceiling on your budget and commit to it. 
  • Avoid buying at the top of your budget if you can. 
  • Have an emergency fund set aside for unexpected expenses.
  • Be patient. Purchasing a house in a competitive market can be frustrating, but perseverance will pay off eventually! 

Above all, a local Realtor® who understands how to evaluate a home accurately can help protect you from unexpected problems down the road. Working together gives you the best chance of a seamless process and a home you love. 

If you’re ready to begin your house hunt, accurate and unbiased advice will give you a great headstart. I am committed to helping you every step of the way to a successful purchase at the best possible terms. Contact me at damir@damirstrk.com or call 416.884.7925 and I am happy to answer all of your questions.