A low home appraisal can derail a real-estate transaction or even cause or even force the sale to fall through. In this article we break down everything you need to know about home appraisals in Quebec. We cover:
- What is a home appraisal?
- How does the home appraisal process work?
- How do appraisers calculate your home value?
- How to challenge a low appraisal?
- How to avoid a low home appraisal?
- Final remarks
What is a home appraisal?
A home appraisal is the process of evaluating a property’s value, carried out by a professional appraiser who remains impartial and unbiased.
Lenders typically conduct a home appraisal before mortgage financing or refinancing to confirm that they are not lending more than the home is worth. This is because the property acts as collateral for the money lent in the transaction. This means that, if the homeowner defaults on their mortgage payments, the lender has the right to seize and foreclose on the property or to conduct a power of sale on the home. As such, if the home is worth less than the amount borrowed, then the lender is taking on a large amount of risk and can lose money in the transaction.
A buyer may also get a home appraisal if they want to ensure that the home selling price is an accurate representation of its value. However, it is more common for a buyer’s realtor to conduct a Comparable Market Analysis (CMA) to check that the property is priced correctly before submitting the promise to purchase. This helps the buyer know that they are not borrowing more than the home is worth.
How does the home appraisal process work?
There are five main areas that a home appraiser is going to take a look at. These are:
Home exterior
The first thing that a professional appraiser will look at when they visit your home is the home exterior. All homes have several common structural components: the foundation, the walls and the roof. The appraiser is going to look for the soundness of the structure and the quality of workmanship with the property, in addition to the home maintenance on the exterior of the home. If you have a hole in the roof, this is something that you will want to fix prior to the home appraisal as it can materially impact the appraised value of your home.
Property size
The second thing an appraiser examines is the size of your home. They verify the property’s measurements to ensure that, if it is listed as 3,500 square feet, it truly is that size. They do this because the appraiser uses the property’s size in the final calculation to determine its market value.
Home interior
Next, the appraiser will look at the conditions of the interior of the home. Specifically the appraiser will look at the windows, doors, flooring, walls, plumbing, electrical, the kitchen and the bathroom. As before, the appraiser will check to see if everything is in operable condition and has been well maintained.
Improvements made to your home
The fourth thing that the appraiser will look at are any improvements that you have made to your home. If you make strategic renovations, you can significantly improve the value of your property. The highest value renovations are typically in the flooring type and kitchen and bathroom remodelling. However, you can also make upgrades to the energy efficiency of your home. There are plenty of federal and provincial renovation subsidies available in Quebec for these kinds of renovations including Canada Greener Home Grant (federal) and Rénoclimat (Quebec specific).
Home amenities
Lastly, the inspector will check are the amenities that your home has. The inspector will judge the amenities relative to comparable homes in your area. For instance, let’s say that you have a fire pit in your back yard, or an indoor swimming pool. These type of amenities can make your home stand out relative to the competition and will therefore drive up the appraisal value of your home.
How do appraisers calculate your home value?
In most residential real-estate transactions, professional appraisers use an approach called a comparable sales price approach.
In short, this means that the appraiser will use recent market data that is most comparable to your home. Comparable homes are nearby homes, of the same property type, that are of similar size and dimensions and are of a similar age, condition and have similar amenities to your home. Normally the appraiser will look for size, dimensions and age that are within a variance of 5 – 10% of the property that they are evaluating.
For example, if you own a bungalow in Montreal West Island, the appraiser will not compare this with a two story detached home in Quebec City with an indoor swimming pool. However, if you own a semi-detached home in downtown Montreal, an appraiser may compare this with other semi-detached homes of similar size and dimension that are in the area.
The appraiser will also use “recent” data. This means that the data used to determine the value of your home should be no more than 6 months old and ideally no more than 3 months. This will allow the appraiser to accurately compare your homes value relative to market trends in your area.
How to challenge a low home appraisal
As a seller, securing an accurate home appraisal is important, because if the lender questions your home’s value, they may decline to finance the buyer’s purchase. For this reason, you may want to challenge a low appraisal. This could be something as simple as a transposed square-footage error, or it could indicate that you priced the home incorrectly from the outset.
If there are no errors, your listing agent can compare the appraised value to the Comparable Market Analysis (CMA) that they originally prepared to recommend your listing price. This will include its own list of comparables and the list of improvements that you made to the property. The listing agent essentially needs to validate here that there is no error in the list of improvements or in the types of comparables used. With this research complete, the listing agent can go back to the appraiser to make sure that the appraiser is using the best comparables and ask the appriser for a “reconsideration of value”.
At this point, if the appraiser does not want to change the appraised value, then you will need to renegotiate the price of your home with the buyer. More specifically, you will either need to drop your price to the appraised value since the buyer cannot borrow more than the appraised value or, the buyer will need to come out of pocket and pay the difference if they have the financial capability to do so.
How to avoid a low home appraisal
A low home appraisal can delay or even derail a sale if the lender refuses to approve the buyer’s mortgage. Here are 6 tips on how to avoid a low home appraisal.
- Set your list price accurately
- List your home improvements well
- Keep your home clean
- Fix up your landscape
- Repair what you can
- Be helpful and coorporative
Let’s take a deeper look at each of these points to see how to avoid a low home appraisal.
1. Set your list price accurately
The first (and most important) that you can do to avoid a low home appraisal is to go on the market with an accurate list price. To do this, you will most likely want to work with a listing agent who will do their own Comparable Market Analysis (CMA) before listing your property.
2. List your home improvements well
Next, you should make sure to list out any home improvements accurately. When completing the CMA, your listing agent should ask for these details and record the date of each improvement, a description of the work completed, and the cost.
3. Keep your home clean
When the appraiser arrives, first impressions matter. A dirty home or damp smells can signal poor maintenance and negatively influence the appraiser’s perception of the property. Clutter can also make it difficult for the appraiser to properly inspect the home. Together, these small issues can leave a negative impression and lead the appraiser look deeper into quality of the property and its maintance. Ultimately this higher level of scrutiny can lead the appraiser to value the property lower.
4. Fix up your landscape
Curb appeal is not only important to attract potential buyers to your property, it is also important to understand that a good landscape can actually add value to your home. For instance, a well maintained landscape sets the right tone for the appraiser as they approach the home. If the appraiser already sees signs of good upkeep, they may view the home more favourably and be less inclined to scrutinize minor issues on the interior of the property.
5. Repair what you can
You should repair what you can before the home appraisal. Specifically, if the buyer has a list of repairs that that they have asked for, you should start with these. If you fix the obvious things the appraiser will get a good sense that you have maintained the property to a high standard. The appraiser will reward this perception with a high home appraisal value. The appraiser will also find it easier to quickly check of each of the home systems if they all work.
6. Be helpful and cooperative
The last thing on our list is to be helpful and cooperative to the appraiser. You can show the appraiser where each of the systems that he or she needs to check and how to switch them on or off. Your listing agent should also ask whether the appraiser wants the agent present during the inspection, as preferences vary. For this reason, it’s important to respect the appraiser’s preference and avoid interfering with their inspection process.
As a minimum, the listing agent should have their CMA made available to the appraiser inside of the home with the comparables that you used to inform your list price. The other thing that you want to have available are your list of improvements. If the appraiser prefers that the listing agent not attend, the agent can email this information to them instead.
Final remarks
Most real estate transactions include a home appraisal. Lenders often conduct the appraisal to confirm that the property’s value supports the loan amount. This helps to reduce their risk and avoid lending more than the property is worth. Sellers and buyers can also order their own independent home appraisal however, this is less common.
A home appraisal typically costs $600 to $800, and the buyer will include it in their closing costs. That being said, in most cases, the lender actually pays for the home appraisal. It is also worth noting that the appraised value is not the same as the market value, assessed value or the value that the realtor proposes from the CMA.
