What to do when the appraisal comes in too low and you can’t close: 6 crucial lessons for buyers and agents

Houses for sale in Ottawa

Because of changing market conditions, buyers who may have been pre-approved for purchase may find out later that, as a result of a low appraisal done before closing, their mortgage loan amount has either been reduced or cancelled and they may not be able to close their deal.

Here are six lessons to remember so you can avoid this happening to you or your clients.

 

1. Remember, pre-approvals are not guarantees that a lender will fund their mortgage.

 

Just because a buyer gets pre-approved for a loan does not mean that the lender will close. There are always conditions on any pre-approval and one is typically that an appraisal is conducted that is satisfactory to the lender.

Always make sure that a finance condition is included in any agreement and do not waive any finance condition until you know for sure that the seller has completed their appraisal and approved the sale price.

 

2. See if there’s a solution.

 

There are solutions out there. For example:

  • deals can be extended,
  • properties can be put back on the market in an attempt to reduce the losses suffered,
  • buyers may be able to borrow from private lenders through a short-term loan until their financial situation improves,
  • mutual releases can be negotiated and
  • prices may be reduced if the parties want to avoid expensive litigation.

In addition, a seller may be able to provide a vendor take-back mortgage. Just be sure to always get legal advice before suggesting any solution.

 

3. What if the client threatens to sue you for what happened?

 

Buyers and sellers think that if they threaten a lawsuit, somehow the agent will agree to pay part of their damages to end the matter. Remember, as long as you, the agent, have not committed fraud, you are protected against any lawsuit by your errors and omissions insurance policy — meaning that you don’t pay for your lawyers to defend you.

The client will typically be asked to pay at least $5,000 just to retain a lawyer to sue you, with thousands more still to come. In my experience, once clients see how much this is going to cost them, they end any talk of lawsuits.

 

4. What if the client threatens to report you to your provincial regulator?

 

Somehow, buyers and sellers are of the mistaken belief that provincial regulators (RECO in Ontario) are collection agencies for consumers. Not so.

While the regulator is supposed to investigate every complaint made against a salesperson or brokerage, they are for the most part looking at whether the salesperson or brokerage followed their duties under the legislation, including the Code of Ethics. They are not there to collect damages against agents for the benefit of consumers.

 

5. How do you demonstrate to the regulator that you’ve fulfilled your obligations?

 

Always ensure that all your paperwork is properly documented and that you have a written record of it. This includes making sure that all documents, including the agreement of purchase and sale, have been carefully explained and signed, and that copies have been delivered to the client.

Try to document any instructions in writing as well, to avoid any misunderstandings later.

 

6. Always speak to your broker or manager before responding to any complaint or potential lawsuit.

 

It’s always stressful when someone alleges that you made a mistake and they’re going to suffer a loss because of what you did, or when they try to blame you for their situation. But, you need to resist the temptation to say something you may regret later.

Try something like this as an answer: “I am sorry you feel that way. I will review my file and my notes and will get back to you.” Then, go discuss this with your manager or company lawyer and figure out what your next step should be.

 

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