You’ve found the home you want, your offer has been accepted, and your mortgage is moving forward. Then your lender says they need an appraisal.
For many buyers, this is where questions start.
What exactly is an appraisal? Why does the lender need one? And what happens if the home doesn’t appraise for what you agreed to pay?
Here’s a simple breakdown of how home appraisals work and what buyers and sellers should know.
What Is a Home Appraisal?
A home appraisal is a professional opinion of what a property is worth in the current market.
A licensed appraiser looks at the home, its location, condition, features and recent comparable sales before providing a written report with an estimated value.
The important thing to understand is that an appraisal is not the same as a Comparative Market Analysis (CMA) from your Realtor. A CMA is used to help determine a home's market value and appropriate listing or offer price, while an appraisal is typically ordered by the lender to determine whether the property provides enough security for the mortgage.
And an appraisal is also not a home inspection.
A home inspection looks at the condition of the property, while an appraisal focuses on its value. You can have a home that appraises at $600,000 and still discover a $10,000 furnace replacement is needed.
Why Does a Lender Need an Appraisal?
At the end of the day, the lender wants to make sure the home is worth enough to support the amount they're lending.
For example, let's say you agree to purchase a home in Calgary for $600,000, but the appraisal comes back at $550,000.
That doesn't necessarily mean the deal is over, but it can create a financing gap.
Generally, the lender will base the mortgage on the lower of the purchase price or appraised value. So if the home is appraised below your purchase price, you may need to come up with additional funds, renegotiate the purchase price, or explore other options with your lender.
This is one reason financing conditions can be so important when buying a home.
When Is an Appraisal Needed?
Buying a home is probably the most common situation where you'll hear about an appraisal, but there are several other reasons a lender or other party may need one.
Refinancing: If you're refinancing your mortgage or accessing equity, the lender may need an updated value of your home to determine how much equity is available.
Home Equity Line of Credit: A HELOC is also based partly on the value of your property, so an appraisal may be required.
Estate or Divorce Situations: When a property needs to be valued as part of dividing assets, an independent appraisal can provide an objective estimate of the home's value.
Private Sales: If you're buying or selling without a Realtor, an appraisal can provide another source of information when determining an appropriate price.
What Does an Appraiser Look At?
An appraiser is looking at much more than just the number of bedrooms.
During the appraisal, they may consider:
Size and layout of the home
Number of bedrooms and bathrooms
Lot size and location
Overall condition
Renovations and upgrades
Finished basement space
Garage and other improvements
Quality of finishes
Age of the home
Neighbourhood and surrounding amenities
Recent comparable sales
Current market conditions
One of the biggest pieces of the puzzle is comparable sales, often referred to as "comps."
The appraiser looks at recently sold homes that are similar to the property being appraised. They then make adjustments based on differences between the properties.
For example, a larger lot, renovated kitchen, finished basement or better location may affect the value compared with another nearby property.
This is also why unique homes can sometimes be more difficult to appraise. If there aren't many similar properties that have recently sold, the appraiser has fewer comparable sales to work with.
How Does the Appraisal Process Work?
The process is usually fairly straightforward.
The lender orders the appraisal: Your lender or mortgage broker will arrange the appraisal through an approved appraisal company.
The appraiser visits the property: Depending on the type of appraisal, the appraiser may inspect the interior and exterior, take photos, measure the property and note its condition and features.
Comparable sales are reviewed: The appraiser researches recent sales and compares them with the property.
The report is completed: The appraiser provides their opinion of value and supporting information to the lender.
The timing can vary, but a standard appraisal is often completed within several business days. Calgary's market and appraiser availability can affect the timeline.
Full Appraisal, Drive-By or Desktop Appraisal?
Not every appraisal involves a full inspection of the home.
Full Appraisal: The appraiser visits the property and reviews both the interior and exterior. This is the most detailed type of appraisal.
Drive-By Appraisal: The appraiser evaluates the property from the exterior and uses other available information to determine the value.
Desktop Appraisal: The appraiser doesn't physically visit the property and instead relies on available information such as MLS data, property records and comparable sales.
Your lender will determine what type of appraisal is appropriate based on the property and financing situation.
How Much Does a Home Appraisal Cost?
For a typical residential property in Alberta, an appraisal can often cost around $350 to $500, although the price can vary depending on the property.
Larger, rural or more complicated properties can cost more.
In many cases, the buyer pays for the appraisal, although some lenders may cover or waive the cost depending on the mortgage and lending situation.
It's worth asking your mortgage professional what applies to your situation.
Appraisal vs. Home Inspection
These two are often confused, but they serve completely different purposes.
Home appraisal: Determines an estimated market value for the property.
Home inspection: Looks at the physical condition of the property and identifies potential issues or repairs.
The appraisal is primarily for the lender. The inspection is primarily for the buyer.
Ideally, you want both when purchasing a home.
Appraised Value vs. Market Value
This is another important distinction.
Appraised value is the professional opinion of value provided by the appraiser based on their analysis.
Market value is essentially what a willing buyer and willing seller agree to in the current market.
A CMA is an analysis your Realtor prepares using comparable properties and current market information to help determine what a home could reasonably sell for.
These numbers can be different.
For example, a Realtor may determine that a home is worth around $750,000 based on recent sales and current competition. A buyer may offer $800,000 because there are multiple offers. But the appraiser may determine the value is $760,000 based on the sales they can support.
This doesn't necessarily mean anyone is wrong. They're looking at the property and market from slightly different perspectives.
What Happens If the Appraisal Comes in Low?
This is probably the part buyers worry about most.
Let's say you agree to pay $800,000, but the appraisal comes back at $750,000.
You have a few potential options.
Review the Appraisal
Sometimes there can be factual errors or information the appraiser didn't have.
For example, the report may have the wrong square footage, missed a significant renovation or used comparable sales that don't accurately reflect the property.
Your lender may be able to request a Reconsideration of Value (ROV) and provide additional information or comparable sales.
Renegotiate With the Seller
A low appraisal can lead to another conversation between the buyer and seller.
The seller may agree to reduce the price, split the difference or make another adjustment to keep the transaction together.
Cover the Difference
If the seller isn't willing to adjust the price, the buyer may choose to bring additional funds to cover the gap.
This is something you should discuss with your mortgage professional before making any decisions.
Review Your Financing Conditions
If you're still within your financing condition period and the numbers no longer work, you may have options to walk away depending on the terms of your contract.
This is one reason I always recommend understanding your financing before getting too far into a purchase.
What If the Appraisal Comes in Higher?
A higher appraisal is generally good news for the buyer.
If you agreed to pay $700,000 and the home appraises at $725,000, you don't suddenly owe the seller the extra $25,000.
You've simply purchased a property that the appraiser believes is worth more than what you paid.
Of course, the appraisal isn't a guarantee of future appreciation. Markets move, and values can change.
How Can You Help the Appraisal Process?
If You're the Seller
Before the appraisal, it can be helpful to put together a list of improvements you've made to the home.
Include things like:
New roof
New furnace or hot water tank
Renovated kitchen or bathrooms
Basement development
New windows
Landscaping
Electrical or plumbing upgrades
Other significant improvements
If you have permits, receipts or other documentation for major work, have those available as well.
You don't need to follow the appraiser around the house, but being available to answer questions can be helpful.
If You're the Buyer
Your main job is to stay responsive.
Make sure your lender has everything they need and understand when the appraisal is being completed.
If you've made a strong offer in a competitive situation, it's also worth talking with your Realtor and mortgage professional beforehand about what happens if the appraisal comes in below your purchase price.
Having a plan before you need one can make the situation much less stressful.
The Bottom Line
An appraisal is an important part of the home-buying and financing process, but it doesn't need to be something to stress about.
Understanding what the appraiser is looking at, why your lender needs the appraisal and what your options are if the value comes in lower than expected can help you feel much more prepared.
Whether you're buying, selling or refinancing, the numbers matter, but context matters too. Knowing how your home compares to recent sales and understanding the current market can help you make better decisions.
If you're thinking about buying or selling in Calgary and want to understand where a property sits in today's market, I'm always happy to help you make sense of the numbers.
