Appraisals, Assessments, Inspections and Insurance
Appraisals - and Assessments
and Inspections - and Insurance
*This material is copyrighted by Carolyne Realty Corp. and may not be reprinted without permission in writing.
Note: real estate is local – if you are outside the jurisdiction of Ontario, you may find this information does not apply to you, but by reading it, the information may trigger some questions to ask your agent, even if you live someplace else.
What do you mean the house has to qualify, you say?
Most people know that when they buy a house, they get to choose how much they will pay for it. That is: what is the house worth? to them? Occasionally a buyer will even pay more than the house is worth, according to market value – for his own reasons. This does happen once in a while. Perhaps a house in an unusual location, or one located in an area where homes seldom come for sale and a particular home that has been sought after by a particular buyer, just waiting for the day when it would come on the market and be his new dream home. The magic word here is “dream.” Buyers have a wish list; some sellers dream about that just-right buyer who will pay too much.
However, there’s more to “qualifying” than for you, as a buyer, to get approved, qualified, or pre-approved or pre-qualified for a mortgage.
Many people don’t seem to know that the house “also” has to qualify. Typically the financial institution you choose to lend you the money to complete your sale sends out an appraiser to evaluate the property and write up an official appraisal. Some still use this process. Others use far more risky computer-generated information to compile their own data. Either way, the price the buyer is prepared to pay versus the market “value” comes into the picture. The banks’ appraisers must provide information and specific findings for a minimum of three like-properties; homes located nearby, of equal value with similar accoutrements and like lot-sizes, locations (on a park, or a lake, forest, etc.), to use as comparables for their paperwork. Ideally the subject comparable sales must be current, generally not going back into history more than 60-90 days. And the information pertains “only” to “sold properties,” definitely “not” taking into consideration the asking price of the as yet unsold property down the street. For-sales do not enter the equation at all.
In down-markets sometimes the time frame requires the appraiser to go back into more historical information to find a suitable comparable sale, likewise in an upward turning market where other homes have not yet reached the same peak in pricing, and make an adjustment for timing. Some appraisers would rather use sold properties in the other end of town, that otherwise meet the matching criteria, rather than do a time adjustment. All this information is in the public domain and the appraiser must compile it in a written format for which he is paid by the bank, and typically that fee is passed on to you, the borrower; the appraiser who supplies this information is accredited and has studied the industry and has honorable credentials and is required to guarantee that his work meets critical inspection. His work needs to be accurate or his right to practice could be terminated.
If you are paying nearly all cash for the house, the financial institution most often doesn’t care how much you are willing to pay for it. Any future value-related issues are yours to deal with. This situation leaves the bank out of the picture entirely, typically speaking.
However, if you are going to give the bank a mortgage for which they in turn will give you the money, especially a mortgage for more than 75% of the value of the property, the financial institution you are working with will be very much interested; that is why you must have insurance to protect your lender, in most circumstances.
Many years ago we didn’t see, so often, the fluctuations and narrow market curves we have experienced in the past twenty years or so, coast to coast to coast. Often when prices in the center of the nation were up, prices would be down in the west coast, and vice versa. Sometimes prices would be sky-high in Toronto for example, yet in Montreal owners couldn’t give away their houses. Likewise in other major centers. In the mid-80’s in the prairie province major cities such as Calgary, when prices dropped, the banks looked to the owners to provide a cash-differential to value, when it came time to renew mortgages on properties where the equity had been eaten up by the market downward adjustment.
People didn’t have the cash and were not in a position to borrow the additional funds. They put the keys to their homes in the front door lock, and walked away; sometimes leaving behind all their furnishings, sometimes five nearly new appliances and upgrade carpet, of course along with the recently finished rec room they borrowed additional money for in the form of a homeowner’s remodel loan, often from the same bank, who used the inflated equity picture to secure that loan. Sometimes today owners have power lines or credit lines at their bank; sometimes for their business. Those loans are registered against the property also, just like a mortgage is. Typically those are referred to as secured lines of credit, often taken out to remodel or upgrade a home after the new owner moves in. The bank is happy to lend the homeowner these funds in an upwardly mobile market.
Real estate is local. Nothing about the real estate business is ever stable-based any more, it seems. We used to be able, using local historical data, to give a general prognosis of what an on-coming market would do. Not so in recent years. The bell curves we used to show charts and graphs would flow in gentle curves and overlap slightly up and slightly down according to any given season and one season would sometimes overlap another by as much as a six week period; year after year REALTORS® could help you could track slight variations in market timing and try to help clients make intelligent decisions . The information, as best as could be evaluated, made sense. Today the same approach to the marketplace makes no sense, and the bell curve variations look like a heart-monitor in a hospital I.C.U. department, attached to a patient in distress. There’s no telling how high the market may yet go, and it is important to consider that the higher the market goes, the lower it may go when the pendulum swings. We hope not, but if history can be relied upon, this is what we should all be considering.
As a buyer, it may be time, locally, to insert a clause in your purchase agreement that your financing is subject to the property meeting your bank’s appraisal, along with your personal qualifications, in an effort to protect your own position; especially if the market begins to tilt downward in any sort of hasty fashion and you are sitting, as a buyer, with a long closing. With the advent of press-talk telling us the bubble is about to burst, you may find yourself with more mortgage than house-value, even if the bank does approve your purchase today; and you might be required by your bank to increase your down payment, as a result; you need to ask your banker what their procedure is regarding this topic.
As a seller, perhaps having sold to a qualified buyer, with a closing several months down the road, you the seller will want to have been guaranteed that the buyer in fact does have a written commitment from a financial institution guaranteeing the availability of the mortgage funds, not just at closing time, but at the time of the offer presentation; that those funds have been set aside to complete the transaction. When a down market happens, it often happens swiftly, giving both buyers and sellers little time to adjust their thinking and little time to adjust their financials. Where does it leave the seller who has in turn bought another property and sometimes that owner has also bought another property (chains can happen with dozens of properties attached to the back end property closing) – and the market crashes? Think back what happened last time. Are you thinking through all the possibilities when you are buying or selling? Is your REALTOR® advising you accordingly as to your rights and possibilities? Your REALTOR® does not have a crystal ball, but should be able to discuss the topic in, at the very least, an overview fashion or have the good sense to redirect you to a professional in a sister field to help you understand what you are doing, if you do not know and he or she does not feel comfortable dealing with this issue. Perhaps your REALTOR® was not in the real estate business during the last downturn in the real estate market.
What will you do next year, when your mortgage comes due, if the house you buy with no money down or ten-percent down, is suddenly worth less than you paid for it? More important what will your bank do? E.g. If you pay 225k for a house, and put as a down payment, 25k, you now have a mortgage for 200k. How would you deal with the situation if the market collapses and your house were only worth 180k at the time of your mortgage renewal? This has happened in prior real estate market conditions. And it could happen again. We hope not. Now that prices of homes are driven by world-events as much as local ones, no one knows for sure where the market will go from here. No one ever did know, in reality. Trends are formed based on historical information, not on prognostication. The market, like life, just “happens.” The market has a life of its own. No one person has any control. That’s what makes it hard to give advice, and yet advice of this nature is expected of a professional REALTOR®.
This is only one of several reasons the bank doesn’t want you to pay too much for any given property. As a buyer you can understand this. As a seller, you may not understand this, especially when you have a property on the market where your would-be buyers are being declined for financing. Is the buyer really being declined because of his personal circumstances, or is the transaction not coming together because your house, as a seller, is not appraising?” because the bank thinks the buyer is paying too much for it, based on comparable data presented by the bank’s appraiser or computer generated statistics.
Typically banks are not REALTORS® or appraisers, per se, and should refrain from offering personal opinions as to whether or not their customer – whether a real estate seller or a real estate buyer, has paid too much or has “got a good deal.” If the banker is not a licenced REALTOR® he or she has no right whatsoever to have a “personal” opinion, and should decline from participating in the conversation. Bankers, on occasion, have been known to put their opinions where they don’t belong and jeopardize real estate transactions, just to make themselves look knowledgeable to their customers. When in doubt, always double-check all the details. Look to a professional REALTOR® for guidance. This same situation applies to building inspectors and others with whom buyers and sellers come in contact with during their real estate transactions. They know their own business but that does not make them real estate value experts, and once again, they, too, should refrain from getting involved in telling buyers or sellers what a good deal they got, or didn’t.
But you have the nicest house on the block, you say. And the bank just has to understand how much money you have spent on upgrading it to make it so. Your real estate agent had better understand the value of your upgrades also, you say. No so. The bank does not give you dollar-for-dollar return on your investment into your home; even so they were pushing you to get a homeowner’s loan to do the improvements. No one tells you that when you borrow 50k at your local bank for home improvements, that when you’ve spent that money on your house, and still have not yet repaid the loan, if you decide to sell your house, that same bank will perhaps only allow you about 5-8k in your house value differential because of your improvements. It’s always been that way. Homeowners never go there in their heads. No one talks about it. Real estate agents have tried, often unsuccessfully to tell homeowners: keep your house neutral, using mid-range price updates and upgrades, and keep it clean. These are the three most favorable attributes you can account for, in getting the highest price in any neighborhood. Gold taps and expensive imported ceramics are no benefit to your resale value. Buyers like to have them, but mostly will not pay you extra for them. You’ve made those improvements for your own pleasure, but the buyer will not give you dollar for dollar value, and the bank will not approve the house to enable a buyer to make his purchase based on your improvements.
As to the topic of assessments, know that there should be a special clause in your offer to purchase, whether you are the buyer or the seller, that addresses this issue. By inserting this point of reference clause into your agreement of purchase and sale, you are opening the topic for discussion. Although assessments are meant to show current market value, they are often not correct and or up to date. You may find the assessment figure lower than the asking price, or occasionally higher. Typically, the property taxes you will pay on your home the following year will be based on the assessment number until someone challenges that value number, or until the property is re-assessed and updated. The purpose of mentioning assessments here is meant to enlighten both buyers and sellers that there is further information available about this topic. And perhaps read the additional important articles regarding current value assessments, building inspections, and now the latest adventure related to the purchase and sale of real estate: insurance - and know that you as a seller, or as a buyer, might not be able to get insurance when you move. If you can’t get insurance, you will want to know what happens then. This topic also needs to be addressed at the time you find the right house to buy; not the day of closing. You need to see the proof, in writing, that you have found an insurance provider. It is no longer sufficient to have a verbal commitment for insurance.
You may also want to read,
Ontario Senior Assessment Property Tax Grant
MPAC says ~ Your house : Your neighbour's house
(Want to know the square footage of your house? Your lot size? tax information? Compare yours to the neighbour's property and others nearby? or Carolyne can do this for you - just send a note)
More valuable information can be found in all the articles on this site. You may want to read all the articles provided here to help enlighten you about areas that could be of concern, thus making your real estate experience less stressful, and you will be ready to make those on the spot decisions. The copyright applies to all articles at the corporate web site for Carolyne Realty Corp.
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