Why first-time home buyers should still buy real estate. Advice on how they can get more bang for their buck. The importance of having a basement apartment. Why having a real estate lawyer, mortgage broker & home inspector as part of your team is important
Davelle M.: Welcome. Thanks for listening … You are listening to The Morrison Report, real estate insights for Toronto. So today what I really wanted to talk about is those first time home buyers and what a hard time they’re having in the market place right now, given the price point of where things are sitting right now in the city of Toronto. And obviously its great for current homeowners, that we’ve obviously made a great amount of money on our real estate at the moment, but it’s very difficult for first time home buyers to get in the market.
So let’s go over a couple of things about what they need to know and why should they still consider getting involved in the real estate market. I mean really, maybe they should just keep renting, because renting is easier and the markets are difficult. Well, for me, it’s all about: Why buy real estate? And I would say you have to buy real estate because number one, we all know the market is changing, but the mortgage rates are at an all time low right now. When you purchase a property it really acts as a forced savings and it really helps you to build equity in the long run.
You know I always say to people, “Imagine being retired 60-65 and still having to pay rent.” What I love about owning real estate, and why I think it’s really important for first time home buyers to get into the market, is because at some point when they retire this way they will own their own home, their mortgage will be paid off, and they will have a place to live rent free, which I think is really important. You know, sure, you can say it’s great to be renters, it’s very cheap right now, but for a lot of renters, they have to keep moving around because their landlords want to sell the properties that they are currently living in. So they don’t end up staying there forever and it’s this constant shifting and moving around. You never really have a place to call home.
One thing I love about owning real estate is that it actually does act as a forced savings plan. I always read in the media, and people say “Oh, you know, you could just save money instead, you could pay rent and save the balance in, whatever, your RRSP, or some sort of investment account.” But that’s not really realistic for the average person. For me, and I think for most other real people, we just need the for savings. If you’ve got the mortgage payment, you know that a good chunk of that money is actually going to be going towards paying yourself first, and not paying off your landlord.
The challenge with having a landlord, of course, as much as I love being a landlord myself, is that you’re paying somebody else’s mortgage. And wouldn’t it be nice to pay your mortgage off first? I think that’s one of the really important things about building a nest egg for yourself. I think also, owning real estate is one of the fastest ways to achieve wealth. My accountant always says to me, you know, he’s looked at people’s books over the last 30-40 years and he can really, truly see, that the big difference in those that are doing well and those who are not doing well is those who own real estate. And he can see, over time, that owning real estate has really helped build their portfolio. There’s no capital gains tax on primary residence, so if you do own your own home, and you choose to sell, and it’s made a quite a bit of money, as a lot of the houses have in the Toronto marketplace right now, at least you get to keep that money tax free, which is another huge advantage to owning real estate.
Also, the values, as we’ve seen in the city, again, have kept increasing and increasing, you’re almost looking at people doubling the worth of their property every six or seven years. And for a lot of people in this city, I think they’re really seeing that their house actually is making more money on an annual basis than they are in their regular jobs. Where can you earn that kind of return, but in real estate?
The other great thing about purchasing real estate is that you don’t have to use all of your own money, because the banks will loan you up to 95% of the value of the home. So, again, it’s a great way to get into the market because you don’t actually have to play with all of your own money to get into the market in the first place. So those are some of my reasons why I say it’s very important for first time home buyers to get into the market, and also it’s a place to call home. It’s a place where you can hang your hat, and paint, and do renovations. And a place where you can start a family, or have friends and family over. So I think it’s a really good important thing and I think it really does sort of help you to build that root base, that you know you’ve got a place to call home and a place you’re going to stay.
So if we look at the average prices in Toronto, they have definitely skyrocketed over the last couple of years, and in particularly this year, for sure. We are looking at well over semi-detached houses and detached houses, for the most part, being worth over a million dollars in the city. So it does make it very difficult for first time home buyers to get into the market, and many of them are starting to look at condos. And condos are certainly a great way to go for first time home buyers. I know that’s what I did. I started off, back in 2001 I bought my first condo, I think I paid $201,000 for this condo. It was a 1+ den, in today’s standards it would’ve been called a two bedroom. And it was just over 800 square feet.
So it was big, I think my biggest regret is that I actually sold that condo. I should’ve never sold it. I should’ve kept it. I should’ve used the equity from that condo and bought my next house, which I didn’t know how to do at the time, which I certainly know how to do now. And the condo prices right now are getting harder and harder as well too. I have a first time home buyer that I’m working with and she’s just increased her budget to about $350,000, and I’m starting to see how few condos are coming in the market now, in the Toronto market downtown, for that price point. It’s becoming very difficult even for first-time condo buyers to really get into the market at a cheaper price point too.
And, you know for people who are coming into the market first time, they really need to weigh: “Why buy a house vs. why buy a condo.” What are the advantages and disadvantages of both options? You know one thing about condos is they’re certainly more affordable, they’ve got great amenities, they’re super safe. In some cases there’s a doorman waiting for you, again, to keep you super safe. There’s very minimal upkeep, there’s no lawns to mow, there’s no snow to shovel, there’s no unexpected repairs. So it’s super convenient to live in a condo.
Of course, one of the advantages of living in houses, because there is low supply, there’s more demand, so the value is going to increase a lot faster than owning that condo. And the house, let’s face it, is going to offer you a lot more space than the condo will. And it can always accommodate changes to your family. And you can get access to the outdoors fairly simple. It’s not about stepping out onto a balcony, you can just step right outside into your backyard. And improvements will have a huge impact on that house, so whether you’re doing a kitchen reno, or a bathroom reno, or finishing a basement, they will have a huge impact to the value of your home.
Some of the disadvantages of owning a house, of course, is that it’s more expensive. And as we’ve seen in the Toronto marketplace, you can either spend, I would say you’d probably need to spend, at minimum, at least $700,000 to get a decent house in the city. And you’re still going to need to do a couple of minor renovations, or at the minimum you’re going to have to spend to close to $400,000 for a condo. So that difference is huge, and obviously it depends on how much money you’ve got and what’s in your budget.
So with a house, you definitely have increased upkeep. You might have some unexpected repairs when it comes to a roof that needs to be done. Most of the housing stock in Toronto is old, let’s face it. We’re dealing with hundred-year old homes. So you’re always going to need to do a little bit of tweaking work to that home, unless it was built brand new for you. But, other than that, these houses are going to require some ongoing work and maintenance and you just have to get used to that, and wrap your head around that as a first time home buyer.
Some of the disadvantages to condos is, it’s hard to accommodate with kids. Although now, more and more, we are certainly seeing people raising kids in condos. That’s something that is certainly happening more and more. We’ve got less space in the condo and you’ve got limited access to outdoors. And then there’s those maintenance fees, and those maintenance fees, unfortunately, never go down, they always stay up. So that’s a bit of a challenge for people who live in condos, is that those maintenance fees, unfortunately, never go down. And if you’re living in a building where the utilities are all included, you’re now always paying for everybody’s utility use, which might not sit so well with you. I know for me, I would certainly prefer to have a condo building where the utilities are not included so I’m only paying for what I use, as opposed to paying for everybody else’s utilities.
Some of the ways that first time home buyers can get into the market, and not have to spend so much money on a monthly basis, would be to buy a home that has a basement apartment. That’s certainly something that I’ve done. I get $1100 per month out of my basement apartment and it really does help me pay the bills, and it’s a huge advantage to people. The great thing about having a basement apartment as well is that it gives you tax deductions. So if you’re going to go spend some money on fixing the roof, well now you can write off a third of that cost of fixing the roof, because a third of your home is being used as a rental property. You can also, with your utility bills, write off a third of your utility bills, assuming that you’re renting out your basement apartment.
Now if you do things in the opposite frame, where you live in the basement apartment, and you rent out the upper floors, now you can write off two thirds of your expenses for your home. So those are some of the advantages of having an income suite. It also helps to pay maintenance costs, and it protects against income loss, so if you’re a single person owning a home, or if you’re a couple owning a home, having that basement apartment income coming in is almost like having a second or a third income coming in. And it can certainly help contribute towards your mortgage payments, which is huge.
Unfortunately, Toronto is, of course, not becoming as affordable as it once was, but people do need to find more creative ways of purchasing property in the city. And whether that’s going to the bank of mom and dad and giving them a little nudge, reminding them that they’re probably no longer paying for a mortgage anymore, and could they give you a little $100,000 – $200,000 gift. That’s certainly a way that a lot of people in the city have been getting by and getting into the housing market right now. If you can’t do an income suite, perhaps you can get a loan, or a gift from one of your parents, or a family member. And then there’s also buying a property with friends. So I’ve certainly have heard of people who are buying properties together, like in a duplex, you know one person might live on the second and third floor and somebody else lives on the main and the basement floor. And they have a shared ownership plan going on. And that way, it allows them to be able to get the advantages of a house, but without having to pay the huge bills of a house, which is huge.
So, you know, where does somebody go for affordable homes in the city of Toronto? You know, I used to send my clients out to the east end of the city for affordable homes, but even that neighborhood is becoming more and more expensive, which I’m saying that people are needing to spend at least minimum $700,000 just to get a home in the east end of the city. I would think, if you go out a little bit east of Main, Danforth and Main area, you can get things that are a little bit cheaper.
The west end of the city is also now starting to become cheaper than the east end of the city, and so if you look around St. Clair and Weston Rd., in the Rockcliff-Smythe area, in the area between St. Clair and Eglington, close to Rogers Rd., west of Dufferin, you’re seeing cheaper homes in those neighborhoods. And that’s certainly a way for people to get into the market, because right now those areas are cheap, but unfortunately they will not be cheap for long because a lot of first time home buyers have to go to those neighborhoods and over time they are driving up the prices. As I mentioned, I used to send my clients out to the east end, Danforth, Greenwood-Coxwell, but those areas are starting to get expensive and Leslieville is oh so trendy now, that to get into Leslieville, you need $800,000 – $1,000,000, just to get a home.
So things are getting very tricky. So other things that first time home buyers should look for when they’re purchasing houses, it’s important to get a home inspection. And when I say get a home inspection, I don’t mean rely on the seller’s home inspection that they’ve left for you. Although some agents will tell you that’s good enough, it’s simply not good enough. It’s important to have your own home inspection. Walk through that house and make sure that everything is okay, and you are okay with fixing everything. Now keep in mind, when a home inspector walks through the house, their job is to pick out every single flaw possible, and they do. So you also have to take that with a grain of salt because you’ve now heard everything bad about the house. So you have to keep that in mind just to kind of give yourself a reality check that the whole house is not falling apart. But again, keep in mind we’re dealing with the Toronto real estate market, where these houses are well over a hundred years old. So they’re going to need things. And your inspector cannot see through the walls, so it’s great to have a home inspection, but you also have to keep in mind that they don’t have radar vision. This is not Superman or Spiderman, and there are things that they might not be able to see as well.
If you’re going to be going into a multiple offer situation, I’d always recommend get the home inspection done before you put in that offer so that you don’t have a home inspection clause, or condition, in your offer. Because the market is so competitive right now, no one is going to accept a home inspection condition on any offer they receive these days, of course, assuming you’re in a multiple offer situation. If there’s only one offer then go for it, put in that home inspection clause. But if you’re in a multiple offer, bidding war, situation, then I highly recommend, make sure you get that home inspection done beforehand.
How else can you buy smartly as a first time home buyer? You can make sure you overlook the clutter and the cosmetic flaws at home. Many people love that shiny new object, it’s why staged homes sell so well, because that’s what people want. People want to see move-in-ready and I’m finding that a lot of the first time home buyers right, because they’re currently living in a condo, everything’s brand new for them. So when they walk into a house, they want to see that same brand newness, and of course that doesn’t exist, so they have a hard time overlooking the fact that the house is old and there might be plaster on the walls, and the floors don’t look so new, and the kitchen cabinets aren’t that new either. The thing to keep in mind is, IKEA is a great, cheap alternative. It’s inexpensive, but it doesn’t look cheap, that’s the thing to remember. Keep in mind, you can change anything with IKEA in some of these houses. You can rip out the kitchen and you can put in a brand new IKEA kitchen and it won’t cost you too much money.
But the other thing too is as a society, I think that everybody’s gotten so used to getting everything they want, right now. And when a lot of people, myself included, when I purchased my home, it wasn’t the most perfect house. I picked a couple of projects that I wanted to start and renew and do out my house. And then every year I would start to pick a different project. So now, of course, because I’ve been in my home for over seven years, now everything looks great, but it’s only because year after year, I selected a project that made sense for me to do in the house, to improve upon it. So it’s good to kind of just kind of have that reality check of you don’t need to have everything that you want absolutely right now. Start small, pick that one project to finish, and then each year, save up and do another project in the home.
Other things for first time home buyers, when you’re buying, don’t buy in spring. That’s probably the most expensive time period to buy in the Toronto real estate market. It’s crazy out there. Houses are selling for $200,000 and $300,000 over the asking price. Summer, we’ll see what happens this summer, but in the summer market things do quiet down a little bit, partly because some of the buyers have gotten sick and tired of losing out on bidding wars in the spring time. So they’ve decided they’re going to take a rest. Well, let me tell you, as a smart first time home buyer, do not rest during the summertime. In the summertime, that’s when you’re still going to be out hard trying to buy a house because that way the competition will be just be a little bit less. People are away at cottages, clients are away at cottages, real estate agents are away at cottages, so it’s really going to bring your competition down a little bit more, which is great, especially in this market, being so competitive.
The other great time to consider purchasing is December. December, again, when people’s attention turns to the holidays, whether it’s Christmas, or Hanukkah, or any other thing that they’re celebrating, they just tend to start going into party mode and holiday celebration mode, and not looking so hard at the housing market. So I would suggest considering looking at at late November, early December, as a great time for a first time home buyer to get in the market.
You really also have to keep in mind, you really need to sort of like what comes out in the market right now, because yes, I’m saying that it’s a good time to buy, but there also is not a lot of inventory during those times of years. So when something comes up on the market, you need to love it. You need to make it good in your mind so that you will actually put an offer in on a house in those times and actually get the house. Make sure that when you buy a place you can also look to see what’s an up coming neighborhood. As I mentioned, you know, the area between St. Clair and Eglington, around Rogers Rd. is certainly becoming a lot more populated these days. You could look at areas like Danforth and Main as well as up coming areas. They’re close to transit, at Danforth and Main there’s a Go Train station there, plus you are on the TTC subway line, which is huge.
Also, look for areas where there’s nice coffee shops and restaurants. There’s a street, I was out with a client recently, I think it was in the Dufferin and Dupont area recently, there’s a street called Westmoreland, and you can see all sort of cute little shops opening, and there was a rum distillery place that was offering rum tastings. But cute things like that you can see are really going to start making that market really interesting and making homes in those areas a little bit more expensive, but right now they’re cheap. The other thing is that Peter Freed has recently taken over the Dufferin Mall in that area, so that you know he’s going to build that mall up to be something quite spectacular. So it’s a great neighborhood to make sure that you buy a home around, because the value of that real estate will go up.
Now, again, and as I mentioned, you really shouldn’t skip the home inspection. It’s something that you should always do. When you hire a home inspector they tend to look at the major systems of the house, so they tend to look at the heating and the cooling systems, and the roof, and making sure that there isn’t a lot of moisture in the basement. But those are things that the regular lay person cannot notice, so it’s really good to have a home inspector take a look at those items. As well, in some cases, in some neighborhoods, mainly in the east end of the city, it’s important to get a termite inspection done as well too. That’s also a very good idea.
And when it comes to buying your real estate, you want to always make sure you get a lawyer involved. Getting a lawyer is super important when it comes to real estate because they’re going to check the status of the property, if it’s a condo they’re going to get a status certificate. And the status certificate is going to basically let your lawyer see what are the financials of that building. How is that building doing financially? Do they have enough money saved in their reserve fund? Are the maintenance fees going to go up in the future? Is there going to be a special assessment coming down, where owners are expected kick in an extra amount of money to fix something wrong in the building? So it’s really important to make sure that you have your lawyer take a look at that, and any time you put in an offer on a condo, make sure that it is conditional on the status certificate, or make sure you see that status certificate before you put in an offer. But usually it’s something that’s available once you’ve put in an offer, you’ll be able to get a copy of the status certificate. And your lawyer will have a few days to take a look at the status certificate, to make sure that everything is okay.
On the housing front, the lawyer needs to make sure that they can search for title. So they’re going to search for good, clean title, which basically means making sure that that person who is selling the house truly does own it. And own it free and clear, there aren’t any liens from Revenue Canada, or construction liens, or anything else on the property. So your real estate lawyer is really going to be looking out for you for that, and a real estate lawyer these days can cost anywhere between $1000 to $2000. I’ve really seen prices running the gammut in terms of what a real estate lawyer will charge you, but they’re a very huge asset to have and its very important to make sure that you use a lawyer that specializes in real estate. Don’t just use an aunt, or an uncle, or a cousin, or somebody that is a regular lawyer. But make sure you use someone who’s specifically working with real estate law, that’s very important.
And if you’re purchasing a pre-construction condo, that’s a whole other kettle of fish. But, again, it’s very important to get a real estate lawyer if you are purchasing a pre-construction condo, because the developer will tack on a number of development charges and your lawyer will be able to assess them and basically go through and cross them out of your deal to make sure you don’t have any additional closing costs, so that’s really important.
One of the closing costs that you should notice as a first time home buyer is that there is a land transfer tax. And in Toronto, unfortunately, we have to pay a double land transfer tax, never fun of course, but there is a rebate for first time home buyers, so that is a great savings for first time home buyers. And the rebate is over $5000 for the land transfer tax if you are a first time home buyer. Now, you will only qualify to be a first time home buyer if you’ve never bought property anywhere in the world. So it can’t just be Canada, it must be anywhere in the world you have never purchased property, and that is how you will qualify for the first time home buyer rebate for the land transfer tax. So all those things are very important.
When it comes to, as I mentioned earlier, I was talking about basement apartments, the basement apartments in the city of Toronto are not always legal. So you need to decide for yourself, if you can stomach owning a property that’s not necessarily legal. Generally, what I would do, is I would call in a fire consultant. I’m really concerned about, I want to make sure whatever I’m building is safe for somebody who’s living there. So I would bring in a fire consultant and make sure that they’ve got fire rated doors, and you’ve got all the necessary things to make sure that you’re not building a fire trap. At the end of the day, if someone’s going to be living in your basement, you want to make sure you can sleep at night, that you know you have built a safe place for somebody to live. You don’t want anything horrible to happen to them.
When it comes to getting money I definitely recommend, talk to a mortgage broker. As a first time home buyer, they can give you a pre-approval and that’s just when they go do the pre-approval they’re going to take a look at your income. They’re going to take a look at your credit rating, and make sure that you are in a good position to put in an offer on a home. And in the marketplace that we’re in right now, you generally cannot put in a finance condition. So meeting with a mortgage broker is very important to make sure that you don’t need to put in a finance condition in the house. So make sure that you do that, it’s super important. And when you do have a pre-approval, you can make sure you are very confident that you can buy what you’re buying. There’s nothing worse than thinking that you’re approved to spend $700,000, and you go out and look for houses for $700,000, and when it comes to offer night, you’re putting in an offer and then you realize, all of a sudden the next day that: “Woah wait a minute, you’re only qualified to shop for $500,000 houses.” So that’s one of the reasons you want to make sure that you get your pre-approval up front, so you know exactly what you’re shopping for, and make sure.
So when you meet with the mortgage broker they are going to go through your finances, make sure that you’ve got your income handy. If you’re self-employed, you’re going to need to make sure that you’ve got your Notice of Assessments from the CRA, so they can see how much income that you’re declaring. But it’s really important to have a good mortgage broker. The mortgage broker can shop around to all of the banks for you, and there’s only, I know Bank of Montreal, for example, doesn’t work with mortgage brokers, but all of the rest of the banks do. So when you are working with a mortgage broker, they can shop around for you, to get you the best rate, so that you can negotiate the best rate. Or, if you don’t want to work with a mortgage broker and you’ve been working with a bank for a long time, then make sure you negotiate hard on the rate. I find with most banks they’ll give you the first rate, but then if you ask again “Hey, wait a minute, is this the best you can do?” They will come down a little bit for you, so make sure that you negotiate with those banks for sure.
And, when you’re looking at spending money on a house, you have to look at whether you’re going to use variable or fixed rate of interest. Now, you know, the market over the last few years, the interest rates have come down so much that even I, as a staunch variable rate person, I just recently renewed my mortgage for cheap rates. So I thought okay, I’m going to do a three year fixed because the rates were so low that I just kind of thought “Why not?” But, I guess in other marketplaces I’d certainly consider doing a variable rate over a fixed rate to make sure you are paying yourself first.
And those are some of my tips for first time home buyers. I hope this has been informative. If you’ve got any questions, please reach out to me. I can be found at firstname.lastname@example.org. So please let me know what questions you might have, what you’d like me to cover in a future podcast. Thanks so much for listening and listening to the Toronto real estate market insights from Davelle.
Join us for the HOUSE HUNTING BOOTCAMP!
At this 90 minute INFORMATION SESSION, you’ll learn:
- What every first-time buyer should know
- Ways to save money over the life of your mortgage that the banks won’t share
- How to avoid the 5 biggest mistakes when making your first-home purchase
- The costs involved in closing a home/condo
- The difference in owning a house vs. condo
- About the pre-construction condo market in TO
- Achieving the mindset you need to make your first purchase
GUEST SPEAKERS INCLUDE:
- Davelle Morrison, Sales Respresentative, Bosley Real Estate Ltd., Brokerage
- Ben Sammut, Mortgage Broker, Mortgage Architects
- Laas Hess, Real Estate Lawyer, Schwarz Law
Date: Monday, February 5th, 2018
Location: 1 Market St Party Room
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So the mortgage rules just changed for the amount of a downpayment required and many people are in support of making it more difficult for first time home buyers to get into the market. Many claim that coming up with an extra $5,000 or $10,000 downpayment isn’t such a hardship.
Really!? I mean really!?
Does the government realize it’s the holidays and many people have turned their attention toward spending time with their families and friends? Let’s face it, many people are spending more money doing their holiday shopping.
So the government, in my opinion, has kicked first-time home buyers in the Toronto market in the gut over the holidays. Merry Christmas folks! You better reign in your holiday spending and forgo that winter vacation so that you can spend an additional $5,000, $10,000 or whatever the case maybe after Feb. 15th, 2016. The alternative is, stop buying presents for your friends & family and quick go buy a property before Feb. 15th, 2016. Those don’t sound like great options for first time buyers.
And to exacerbate the situation there aren’t that many properties on the market during this time of the year so not only must they buy now, but they don’t have the widest selection.
Then there are the people that were already putting 10% down that don’t feel this announcement affects them. Well it actually increases the competition in the marketplace, so they will be affected too.
It will be interesting to see what the next 2 months of the Toronto real estate market will look like before this deadline sets in. Check out my interview with Pat Foran from CTV News on this subject here
Houses in the city are definitely getting more expensive. Ever since January, the market has been extremely active with 20+ offers on some houses. In order for first-time home buyers not to be shut out of the market, they may need to get more creative when it comes to buying their first home. I’ve always been a fan of having a basement apartment. I have one in my house and the extra money that I earn each month acts as a second income. The other thing people can do is to purchase a house with a friend. They have to make sure they select a house where there are at least 2 decent sized apartments so that each person can live in their own separate space. It’s a great way for people to enter the housing market if they don’t have enough of a down payment on their own. In addition, it might not be such a bad thing to have someone to share the tasks of snow removal, landscaping & garbage renewal. Both of these ideas can help someone on a minimal budget to become a home owner faster. As our market becomes more expensive, buyers will need to be creative so they can get into the market. The apartments might be slightly larger than a condo and allow the owners to access their first rung on the property ladder.
Toronto’s housing market is a tough place for buyers. This is mainly because there aren’t enough houses currently on the market to satisfy their demands. It’s leading to many bidding wars where anywhere between 9-34 people are bidding on the same house. And it’s driving the price up of some homes to well over $100,000 over the asking price. This is occurring in Toronto’s most affordable neighbourhoods: Leslieville & Bloor/Dundas West. Buyers get sick of losing out on so many houses that they decide to offer a very high price for a house to make sure they get it. However there are ramifications for over paying for a house. Will the bank’s appraiser agree that this is the new value of the house? If the buyers are using CMHC, will their appraiser agree to finance the house if they don’t feel it’s worth what they paid? In addition, buyers tend to waive their finance conditions to be competitive during a bidding war which presents a further problem, if the appraiser does not agree with this new value. It’s something many buyers need to think of before they over pay for a potential home. They should also keep in mind that the markets in May through the end of August can offer them a much calmer pace for purchasing houses, without as many bidding wars.