Toronto's real estate has been active for many years now with the exception of late 2008 and early 2009 when the economy contracted. Ground level (townhome, semi-detached and detached) homes have had considerable shortage on the supply side creating bidding wars which is considered normal in Toronto.
Bidding wars are set up to maximize the selling price and benefit from potential buyers' emotions during the multiple offer process. However, lenders require appraisals done on the property to obtain "market" value to lend on. What if there is a discrepancy between the purchase price and appraisal value?
Purchase price: $850,000. Appraisal value $820,000. Mortgage amount: $656,000 (80% of $820,000) not $680,000 (80% of $850,000). The buyers are short $24,000.
- Buyers happen to have additional funds to cover the shortfall
- If buyers don't have $24,000, a second mortgage can be arranged for the $24,000. Keep in mind not all lenders allow second mortgages behind their first mortgage. Knowing which lenders do is important
- Gifted funds from family of $24,000
- Pull equity from other properties through a line of credit or refinance. The additional debt would have to be calculated into the overall debt service ratios (GDS/TDS)
Due diligence is required especially for cases where a home was bought in a multiple offer situation and the buyers have to sell their home. What if the buyers don't get the desired selling price for their home? What if the two closing dates are far apart? Should one buy or sell first?
Consult a mortgage professional upfront to run through the scenarios to have contingency plans just in case. Also work with real estate agent who specializes in the local area and has the pulse of the neighbourhood's real estate market. To discuss whether you should buy or sell first or plan buying your next home, please contact Nawar.