Under provincial laws, you have no obligation to disclose the results of a home appraisal to the seller. Consequently, a high home appraisal is good news for the buyer because you will pay less than the market value for the home.
The terms of the purchase contract and contingencies determine if either party can pull out because of a high appraisal. If a home appraisal comes in high, below is everything you need to know if you are in Alberta, Canada.
Quick take: Can the seller back out of the appraised value is too high?
- A higher home appraisal may grant you access to a larger loan.
- You may eliminate mortgage insurance faster if your appraised value is higher than the offer.
- If you decide to resell the house, you are in a better position to profit from the sale.
- Lenders use the lower of the two values (home appraisal/offer) to calculate the loan-to-value ratio, which may impact the buyer negatively.
Is it good to have a high home appraisal?
For the buyer, yes; for the seller, No. A high appraisal means you must let go of the home for a lower price than its market value. That is, if there is no “appraisal contingency” in the contract. What do I mean?
During the home sale process in Alberta, the parties sign a purchase contract before conducting a home appraisal. If you accept an offer unconditionally, you risk a lawsuit if you pull out of the agreement without a contractually good reason.
To protect your investment, you may sign a conditional offer with a dispute resolution process and allows you to exit the transaction should specific criteria be met.
What happens if a home appraisal is too high?
The majority of lenders in Alberta are unwilling to pay an amount higher than the appraised value. “Appraised value” refers to the market value of a home in the opinion of a professional appraiser.
For more information on appraisals, view our article on everything you need to know about appraisals in Alberta.
If a home’s appraisal is higher than the offer price, your lender will only pay the lower value. That may mean paying the difference out of pocket. One benefit of a high home appraisal is the buyer may not have to pay for CMHC mortgage insurance for too long.
Another benefit of a high home appraisal is that your home’s equity gets an instant bump. Meaning you will be able to qualify for a home equity loan faster -that you may put towards upgrades or improvements if you choose.
Can the seller back out if a home appraisal is higher than the offer?
As the seller, you may ask for a copy of the appraisal report if one has been done, or you may pay for an appraisal. What is vital to remember is that once you sign a contract, you are bound to its terms. That means violating the terms of a contract may result in action being taken against you.
As mentioned, if you include a contingency clause or addendum in the contract, you may have a safe, legal way out of the contract.
Your options if an appraisal comes out higher than the offer include:
Work with the buyer to solve the gap
Through negotiations, the buyer may agree to increase the purchase price, or you may agree to lower the contract price. You may also meet in the middle. We recommend consulting your lender and a REALTOR® before deciding what to do.
Walk away if the contract allows it
An appraisal contingency, as mentioned, allows you to exit the deal without legal repercussions. If there is no contingency, you may negotiate an exit with the buyer to avoid going to court.
Sell the home for the agreed-upon contract price
If there is no contingency for a higher appraisal, then you may have to sell the house for the agreed-upon contract price.
What is an appraisal gap clause?
As the name suggests, an appraisal gap clause is an addition to a purchase offer that dictates what happens if the appraisal value is higher or lower than the offer. Including it in the offer gives the seller confidence that the buyer will not back out because of a high or low appraisal, depending on the wording.
Appraisal gap clause: What to remember
- An appraisal gap clause may require the buyer to bring in more cash to complete the deal.
- You may agree to cover the difference regardless of the amount.
How much money are you comfortable paying out of pocket?
As a buyer that is the first question you should ask before signing a contract with an appraisal gap. That way, you may limit how much you must pay out of pocket should the appraisal amount be higher than the offer.
We recommend consulting a real estate attorney before including an appraisal gap clause.
What happens to your earnest money if the appraisal exceeds the offer?
It depends on what the contract says. If it says “non-refundable,” you may lose your deposit if you back out. That is why it is important to include an appraisal contingency.
Do sellers usually increase their asking price if the appraised value is higher?
As mentioned, you have no legal obligation to disclose the findings of a home appraisal to the seller in Alberta. However, if you decide to disclose the report, the seller may renegotiate or back out of the deal if the contract allows it.
When can the seller back out without legal repercussions?
- If there is an “exit/contingency clause” that allows it.
- If there is a breach of contract or evidence of fraud.
Can the seller contest an appraisal value of a property?
Generally, there is no need to contest a high home appraisal if you are the seller.
What you need to remember is if you disagree with the finding of a home appraisal in Alberta, below is what you need to do:
Review the findings, and contact the appraiser
This is best done with the aid of an experienced REALTOR®. The idea is to find mistakes in the findings. Common errors to look out for include:
- Failure to accurately identify the scope of the work.
- Failure to comply with changes in real estate market trends.
- Inaccurate assessments of comparable properties or the neighbourhood.
- Inaccurately adjusting the sale prices of comparable properties.
An experienced REALTOR® or property appraiser should help you find errors in the report. If you find errors, contact the appraiser, or get a second opinion.
Get a second opinion
You may contact your REALTOR® or a certified appraiser to get a second opinion. Contact your lender to find out if that is an option.
Tip. You have the option to look for another lender if the current one pulls out.
What to remember:
- If a home appraisal is higher than the offer, you do not have to disclose that information to the seller.
- The seller may pull out if the contract allows it.
How to increase the appraisal value of a home in Alberta
It is in the best interest of the seller that the appraisal matches or is close to the offer. Consequently, you may increase your homes appraisal value by doing the following:
- Stage the home. That entails improving the home’s internal and external appeal. We recommend cleaning, decluttering, painting, and making the home as appealing as possible.
- Point out major improvements to the appraiser. This could be improvements such as the roof, flooring, additions, and so on. We recommend keeping the receipts and avoiding unnecessary major improvements.
- Make necessary repairs. Fix dripping faucets, broken gutters, and other problems that may exist.
