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The Appraised Value Came in Lower - How to Explain it to Your Client

One of the biggest challenges mortgage specialists and brokers face is having to explain to a client why the appraised value of their property does not meet the client’s expectations. This is especially true for refinances and even more true where neighbourhood housing values are fluctuating wildly.

Considering that a home is where a client spends most of their time, where some raise family, where the house is usually a major portion of the client’s retirement and is normally one of the biggest sources of their pride, it isn’t surprising that lower than expected valuations can be taken personally.

As a mortgage professional, it’s difficult to have to explain to a client why the value did not come in. Below are some hints and tips that my help:

  1. Real estate professionals focus on maximizing the potential price of the home (even when just giving an opinion) whereas lenders expect appraisers to demonstrate significant historic evidence to support an appraised value. Realtors look forward and Appraisers look back. That is an important distinction because there is not one lender in Canada that will allow an Appraisal to use existing MLS or live listed properties….it must always be sold properties or ones with non-conditional offers on them.
    1. When a house down the street is listed for more money, it doesn’t matter to the appraiser. They can’t use that property in the appraisal report unless it has a firm offer on it; OR
    2. The comparable properties used in the report must have recently sold.
  2. Appraisers must always use the most current comparable properties when completing the Direct Comparison Approach on the appraisal report. How old ”comparables” can be depends on the lender.
    1. Some lenders require comparables be no more than 60 days old. Others allow them to be as much as 6 months old.
    2. While the amount of time differs from one lender to another, appraisers are mandated to select the most current comparable properties. This is quite noticeable when there have been sudden shifts in the housing market. In February of 2020, there were many homes listed for sale in the GTA at escalating values. By April that number had shrunk considerably, and some neighbourhood valuations were negatively impacted. Appraisers were required to use potentially lower values in April rather than the previously higher values in February because that’s what Lenders expect. This is know as “Current Marketability.”
  3. Appraisers cannot use homes of a different nature when completing the Direct Comparison Approach on the appraisal report. A bungalow cannot be compared to a duplex, a duplex cannot be compared to a triplex etc. etc. Also, homes may be the same size but still can’t be used for the Direct Comparison. Consider, a bungalow built in 1960, 1000 square feet, situated beside a railway track that has never been refurbished cannot be compared to a bungalow built 2 weeks ago, 1000 square feet, higher end finishing’s and on waterfront.
  4. Lenders will only allow properties to be compared when they are similar in quality as well. One way to measure this is using the Gross Adjustments % for each comparable. The normal adjustments threshold is 15%-25% depending on the lender.
  5. Appraisers must use properties in the same neighbourhood that exhibit similar characteristics. For example, in Toronto you may see $500,0000 homes on one block, and $2,000,000 on another block on the other side of the street. Similar locations but different neighbourhood characteristics, values, and marketability.
  6. Home Improvements do not always pay off. If a homeowner spends $100,000 in upgrades, this does not automatically mean the value of the house has gone up $100,000. In many cases the upgrades bring the quality of finishes to market average. At the other end of the scale, the improvements are substantially superior to the neighbourhood and appraisers may have difficulty finding similar comparable properties to use in the report. We recommend homeowners get appraisals on their properties “as if” the renovation has been completed. This will give them a good idea what it will appraise at when completed.

As you see, there are many reasons why a home may not appraise at the expected value. As someone who regularly funded over $70 million in mortgages, I know how important it is to provide as accurate a value as possible in the mortgage application sent to lenders. It improves your funding ratios, your compensation, and client satisfaction. And I always found it frustrating when the expected value was way off base. It was a waste of everyone's time.

We recently hosted a webinar that gave some tips on how to best leverage technologies that most brokers have access to. Among the tips are to make sure the comparable properties used in the AVM are “like” the subject property. Using Google Street View (or Google Earth for rural) to get an idea how similar the properties are, and only use those when making estimates. Contact me if you'd like the link to the video.


Ok, so you've got a property that didn't come in at the value you may have expected. All is not lost. There are several options that might still be a good fit for the customer. A 2nd mortgage, or a 1st with a different lender that will give you a higher LTV might work. Some companies offer a secured visa card at an LTV that might work for your client. 

myBrokerBee.com is a good source for alternative financing should you find yourself in this situation and not sure where to go next.