How to Avoid Deal-Flopping Appraisals

You think appraisers work for you just because you pay them? No they don’t. 

They work for your lender, or at least they have the lender’s best interest at heart not yours because they get a ton more work from lenders than they do from you.

Lenders want low appraisal values so they can argue it’s not their loan-to-value ratio LTV mortgages that are to blame for the fact that your mortgage proceeds are lower than you expected. “It’s your appraiser’s fault.”

mortgage proceeds = appraised value x LTV

So if your lender approves a LTV of 80% on a purchase price of $500,000, you’d expect mortgage proceeds of $400,000. But if the appraisal comes in 10% low, you only get 80% of $450,000 or $360,000 leaving you $40k short.

From the lender’s POV, they now have effectively lowered their LTV without having to say to either the governor of the Bank of Canada or the chair of the Federal Reserve that they short changed Canucks and Yanks…

Anyway, here’s how to avoid getting a low appraisal that’ll crater your financing or refinancing:

-together with your lender, realtor, mortgage broker and lawyer, pick an appraiser who does not have a reputation as a deal flopper

-do your own CMA (comparative market analysis) 

-provide
that CMA and all supporting data (on a detailed spreadsheet showing all the
renos and improvements you’ve made, many of which are invisible to an appraiser or
building inspector plus details of your closing costs which are often non negligible, also
include good quality pro images cuz a (GOOD) picture is worth, well you know
what it’s worth) to the appraiser in advance or at least when they come on
premises 

-if they
refuse to accept your information, fire them on the spot/don’t let them come
onto your premises/after all, you are paying them not the bank 

-maybe fire
your mortgage broker and lender too if this persists  

-accompany
your appraiser on his/her property tour pointing out important facts including
all the reasons why your property has additional value 

-make sure
your CMA covers as much as possible: list comparable sales, then calculate
value using both an income approach, direct comparison approach and cost
approach (replacement cost less depreciation) 

-for commercial or income property, make sure you know all your income and expenses, have them available in a spreadsheet and find out what cap rate applies to your property (since value based on the income approach equals net operating income before debt servicing divided by cap rate)

-you can be vague about your rental program or the nature of occupancy because, frankly, you don’t actually know–every project is an experiment until proven otherwise so, if you are asked, maybe it’s owner-occupied for a while, maybe later on it’s rented out via airbnb.com or perhaps you’ll have a few roommates–the thing is KISS, keep it simple

-and be nice and pray

@ profbruce @ quantum_entity

postscript by Chad Robinson, BestInterest.ca:

-remember s/he who orders the appraisal owns the appraisal, not who pays for it.

-there are also a ton of different types of appraisals; for example an appraisal with a value criteria of a sale within 30 days is different from one with a sale time frame of 6 months. Some lenders force appraisers to use unrealistic sale times therefore lowering value.