You’ve found it: the cottage of your dreams. The offer is in, and the sellers are on board. But then the mortgage appraisal comes back lower than the agreed-upon purchase price. What now?
Well, the upside is that this is uncommon. “It doesn’t happen a lot; maybe five to 10 per cent of the time,” says Jeff Bauer, broker at Royal LePage Heartland Realty in Goderich, Ontario.
An appraisal is a crucial step in the home-buying process, and it’s required in nearly every mortgage application. A low appraisal can happen when the market is in flux and market values are being overinflated due to bidding wars.
“A market that’s in flux is going to be more prone to an undervalued appraisal,” Bauer says. “When the market shot up in 2021 and 2022, people were bidding way over the asking price, and it was more difficult for appraisers to come up with the true market value of properties.”
While cottage country seems to be cooling off in the past year or so, some bankruptcy specialists in Toronto have seen an uptick in homebuyers unable to close on pre-construction properties, as appraisals come in much lower than the purchase price.
What can you do if your cottage appraisal comes in lower than the purchase price?
The simplest way to deal with a low appraisal, according to Bauer, is to try to bump up the down payment. “If somebody can make a larger down payment to make up the difference between the appraisal amount and the agreed-upon price, that’s always the simplest and most common way to do it,” he says.
If somebody needs additional cash, Bauer says they can often use the equity from their primary residence. “They could perhaps leverage the equity in their primary home through a home equity line of credit to make up the difference between the appraised value and the agreed upon price.”
Bauer has also experienced buyers seeking out a loan from family or friends to cover the difference. “I’ve seen instances where buyers can’t do it because of the appraisal, but really want the cottage. They ask their brother and sister-in-law to get in on it, and they split it that way.”
The seller could help, too. “Depending on the seller’s situation, they could hold a small second loan on a property, wherein the seller lends part of the purchase price to the buyer,” Bauer says. Known as a vendor take-back, the buyer makes payments to the seller for a portion of the mortgage. He has seen this more often in the buyer’s market, but it completely depends on the seller’s situation. If the buyer needs a vendor-take back, then the seller might consider it to make it easier for the buyer to purchase their property.
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What condition can you put in the offer?
If you can’t raise extra funds, the next best way to protect yourself from a headache—and possibly legal ramifications—is to put a finance condition in your offer. The agreement would say that the sale is dependent on financing. If you cannot get financing, you can back out of the sale within an allotted time frame outlined in the agreement.
When the market conditions permit, buyers should include conditions, especially when it comes to cottages, says Bauer. “If the appraisal did come in way low, they’d be able to walk away and get the deposit back, no harm done,” Bauer says. With the market favouring buyers, lately, there has been space to allow for those sorts of conditions to be included.
A local realtor familiar with the area can help
Appraisers take a closer look at recreational properties such as cottages, according to Bauer. The lender will want specifics on whether the cottage is four-season, what sort of water service it has, whether it has its own well or is on municipal water services, and information on the heat source.
“Oftentimes, people that are purchasing these cottages aren’t familiar with those things,” Bauer says. “It’s important to have a realtor that understands the market that they’re working in so that they can properly advise on those aspects of conditions.”
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