Why an appraisal comes in under value (and what brokers can do about it)

Canada’s banking regulator has been sounding the alarm to lenders as the gap between potential high-rise appraisal values and purchase prices widens, creating knock-on effects for brokers and their clients.

Recently, the Office of the Superintendent of Financial Institutions warned Canadian lenders about blanket appraisals, Reuters reports. Amid large-scale downturns in major condo markets across the country, the financial watchdog has identified risks associated with these appraisals as current values may not support previous estimates.

However, rising appraisal gaps are not limited to blanket approvals — nor are they exclusive to urban condos. They are symptomatic of a far-reaching challenge facing the contemporary Canadian housing market.

With a broad-based cooling of home prices — including for all property types as of April, according to the latest reading of the RPS House Price Index —  appraisals are more frequently coming in lower than purchase prices or previous estimates.

These appraisal gaps have obvious implications for mortgage brokers, as some borrowers might struggle to obtain financing to close. However, there are steps that brokers can take to remedy the situation when an appraisal comes in low.

Why appraisals come in under value

The appropriate course of action for brokers depends on the specific circumstances surrounding the appraisal. Here are some of the most common reasons for an appraisal to come in low:

• Unrealistic client expectations during refinancing: This is the most common reason for a low appraisal, says Julian Perera, Appraiser Network Manager, Western Region, at RPS Real Property Solutions. “For a refinance, the lender starts with the estimated value provided by the client. So the lender is asking the client, ‘What do you think your house is worth?’ Obviously, if a client is not educated on the market, they could give an unrealistic number.”
• Quick shifts in the real estate market: Momentum can shift dramatically from month to month — or between the time the property value is estimated and the deal goes firm. “The value could change within those three or four months between agreement to purchase and closing,” says Perera.
• The lender’s terms of reference: For example, on an acreage property, some lenders may only include the house, plus a maximum of five acres, towards the total value rather than the entire property, which may be larger.
• Premium pricing for pre-construction units: It has become increasingly common for appraisal values on brand new homes to fall short of the agreed-upon pre-construction purchase price. This is what caught the attention of OSFI late last year.
  The trend is especially prevalent in the more volatile Greater Toronto and Greater Vancouver markets. “We are facing major issues because people were buying pre-construction in 2022-2023 at the market’s peak, and these homes were set to close in 2025-2026, when there’s been a drastic change in the market,” Perera explains.
• A mistake or incomplete documentation: For example, in the case of a yet-to-be-built custom home on a vacant lot, if certain details are omitted, such as the inclusion of heated floors or a large slab marble counter, which can result in a lower valuation.

What brokers can do about a lower-than-expected appraisal

There is more than one step brokers or lenders can take if they are not satisfied with the appraised value of a home.

After reviewing the appraisal report, the broker can opt to appeal the decision with a formal Value Appeal. “We do offer lenders and brokers the option to appeal a value if it comes in under,” says Perera, adding, “We need substantial evidence for the appraiser to look at.”

Typically, additional comparables are required to make the case for a higher valuation. “Brokers have the option to submit a value appeal on our system, and attach those comparables to see if they can add them to the report to support a higher value,” says Perera.

However, brokers also have the option to question specific calculations or adjustments contained within the appraisal report. For instance, they may notice that certain attributes appear not to have not been factored into the appraised value. “Our in-house appraisal team will have no problem reviewing that as well,” says Perera.

If the value appeal is rejected upon review, the broker’s other option is to open a second-opinion order, which is assigned to a different appraiser.

Before submitting a second-opinion order, Perera recommends reminding the client that it is possible this follow-up appraisal may not yield a higher valuation.