Appraisals can be expensive, so it certainly is a concern and confusing for the consumer to know why they are having to pay for it and why they don't get a copy. Appraisals can also can save your butt if your buying a home that is overvalued, undervalued or something else that is funky.
When are appraisals required?
Appraisals are generally required when the property is unique, rural or the value doesn’t seem correct and for mortgages where you are putting 20% down or more on your purchase.
If the bank underwriter can’t determine the correct value, they will ask for an appraisal.
Some examples could be: If there is a RCMP flag for illegal activities, big “out” buildings or shops, ALR land, acreages, very old properties or in areas where their maybe old oil tanks as well. Frankly if the property isn’t a standard, metro Vancouver urban house within 15 years old…you should expect an appraisal.
20 or more % down payment. Since the bank is absorbing 100% of the risk of the property, they want an appraisal 99% of the time.
50% or more down is a little less risky and they will usually just use the property tax assessment or internal appraisal to obtain a value. Depends.
If you buy in a new development, put down your 5% deposit but it doesn’t complete in 2 years, you will need an appraisal. Maybe the value has dropped? The lenders only lend on the VALUE of the property, not what you paid for it. If you paid $800,000 for your new townhouse, and when it completes 2 years later is only valued at $780,000 the bank will only lend on $780,000. If you only have saved 5% down, you might be in trouble. You will need to come up with $20,000 to cover the shortage in value. If your not working with a broker that is monitoring this, you could very well have to walk away from your deal and your deposit.
When is an appraisal NOT required?
If you are putting 5-20% down, you likely will not require an appraisal. Your mortgage is “insured” by either CMHC, Sagen or Canada Guaranty. If you default and the bank has to sell it, it’s insured and it’s up to the insurer to value it correct. Some lenders may still charge a nominal fee of $50-100 that is built into your mortgage to do an internal type of appraisal that just double checks comparables to your home.
Other points to note:
Do not order your own appraisal – each lender has their own list of approved lenders. You can order it, but it may not be accepted by the banks. Have your broker order it always.