Anonymised, illustrative composite. A buyer’s own pro forma assumed rents would reset on closing. Ontario law does not work that way, and the appraisal was the moment that became unavoidable.
At a glance
An investor buyer found a triplex with three long-term tenants and built a purchase pro forma assuming the below-market rents — a combined $3,300 a month across the three units — could be brought up to what comparable renovated units in the area were fetching, an amount the buyer’s own research put at roughly $5,400 a month combined. On that assumption, an agreed price of $960,000 looked like a reasonable multiple of near-term achievable income. The offer went in with a financing condition, and otherwise unconditional.
A change of ownership does not reset a tenancy in Ontario. “The new owner steps into the role of landlord and is bound by the existing lease or tenancy agreement on the same terms the previous owner agreed to — the same rent, the same conditions, and the same tenant rights,” and the buyer’s ability to raise rent is capped by Ontario’s annual guideline, not reset by closing day. That reality collided with the pro forma the moment the lender ordered an appraisal: “Lenders and appraisers evaluating an income property often look at actual, current rental income rather than the unit’s potential market rent,” which is exactly what happened here.
Using Ontario’s 2026 rent-increase guideline of 2.1%, even a maximum annual increase on the $1,050, $1,100 and $1,150 units brings them to roughly $1,072, $1,123 and $1,174 after one year — a combined gain of about $69 a month, nowhere close to closing a $2,100-a-month gap between actual and hoped-for market rent. The appraiser’s valuation, built on the actual $3,300 in current rent rather than the buyer’s $5,400 estimate, came in at $845,000 — $115,000 below the $960,000 agreed price.
The mechanic here is entirely about which number an income property gets valued on. The buyer’s agent had underwritten the deal on potential rent; the lender’s appraiser, following standard income-property practice, valued it on actual rent — the number a sitting tenant with security of tenure is actually paying, and will keep paying next year subject only to the guideline cap. Because the financing condition was still open when the appraisal came back, the gap became a negotiating fact rather than a closed loss: the buyer was not yet bound to close at $960,000 for a property the lender had just valued at $845,000.
The buyer used the appraisal to renegotiate, and the deal closed at $902,500 — the exact midpoint between the original $960,000 agreed price and the $845,000 appraised value, with the seller accepting a lower number rather than losing the buyer’s financing and starting over. The financing condition, still open when the appraisal landed, is what gave the buyer any leverage to renegotiate at all rather than simply being stuck.
The buyer’s agent also revised the pro forma going forward on actual rent plus the guideline-cap trajectory rather than a market-rent assumption, which is the version of the numbers a future lender, and a future buyer if the property is ever resold, will actually test the deal against.
Had the buyer waived the financing condition early — a pressure many buyers face in a competitive multiple-offer situation — they would have been contractually bound to close at $960,000 regardless of what the appraisal later showed, since a waived condition binds the buyer even if what it was protecting against (here, the financing not supporting the price) later turns out to be exactly the problem. $960,000 against an $845,000 appraised value is a $115,000 overpay with no contractual way back out, on a deal that only avoided that outcome because the financing condition happened to still be open.
The listing marketing itself was the flag: it described the units as “well below market rents — great upside potential,” language written to sell the gap as opportunity rather than as the constraint it actually is under Ontario’s tenancy and rent-guideline rules. A buyer’s agent seeing that phrase should run the guideline-cap math — how long would it actually take, at 2.1% a year, to close the gap — before the offer price gets built around an assumption the rules don’t support on any realistic timeline.
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