Real Estate Appraisal

Whether you are buying or selling a home, re-financing a property, or trying to determine a property’s value for other reasons, you may want the services of a real estate appraiser. Real estate appraisers provide a valuation of a property.

CONSUMER TIP: Comparative Market Analyses (CMA) your real estate licensee might use to assist your decision on a listing price ARE NOT real estate appraisals. CMAs must provide a range of value, not an exact value, and must expressly state they are not an appraisal. Lenders do not use CMAs when determining the value of your property during the mortgage underwriting process. They will use an appraisal prepared by a licensed real estate appraiser.

Appraisers can be called upon as consultants or valuation specialists to provide opinions on:

  • the current value of property being bought or sold
  • future value of property being built
  • value for mortgage or lending purposes
  • value to assist in investment decisions
  • value of assets
  • value of property involved in a legal dispute
  • verification of damage claims
  • value to properly measure property tax assessments, capital gains and other taxes
  • value of property to determine compensation when property is expropriated
  • consulting—feasibility studies, property management, lease analysis, highest and best use studies

An appraisal may be required for private sales or transactions involving property not listed on a listing database, a high loan-to-value ratio or for non-sales transactions, such as refinancing or renovation loans. Those purchasing a property from a “For Sale By Owner” without a licensed real estate agent may be even more interested in having an appraiser evaluate the property as it may provide greater piece of mind that the price is appropriate.

Appraisers produce appraisal reports based on the specifications of a property and the variables that help determine its market value.

Members of the Appraisal Institute of Canada (AIC) are required to include:

  • the intended use of the appraiser’s opinions and conclusions
  • the purpose of the assignment, including a relevant definition of value
  • whether the appraisal is current, retrospective, prospective or an update of an earlier appraisal
  • an analysis of reasonable exposure time linked to a market value opinion
  • the effective date of the appraisal and opinions contained within
  • the date of the report
  • location and characteristics of the property and the interest appraised
  • a formal opinion of value
  • all assumptions and limited conditions
  • any hypothetical conditions
  • land use controls

Other professional appraiser associations have similar requirements of their members.

Lenders, too, sometimes have a particular reason for involving a real estate appraiser in a transaction. A lender wants to ensure that its money is being used to purchase something of value, that is priced appropriately and for which the buyer is not paying too much. In some cases, prior to advancing mortgage funds, a lender will require that an appraisal be completed so that they have assurances that the property is worth what the buyer is paying for it.

There are more than 600 real estate appraisers and candidate appraisers in Alberta and deciding which one to hire may seem a daunting task. Where do you start?

  1. Word-of-mouth. Ask people whose opinion you trust if they know of a good appraiser.
  2. Search the Internet. The Appraisal Institute of Canada’s web site includes a database of Canadian appraisers who have the designation Accredited Appraiser Canadian Institute (AACI) and/or Canadian Residential Appraiser (CRA) and/or Professional Appraiser (P.App). The Canadian National Association of Real Estate Appraisers web site also includes an appraiser database.
  3. Ask your real estate licensee. Real estate licensees are experienced professionals with excellent knowledge of their industry and your representative may be able to recommend a reputable appraiser. Keep in mind, though, that if you use an appraiser your real estate professional recommends, your real estate professional may receive a referral fee from that appraiser. Before accepting a referral payment, your real estate licensee must advise you of the referral fee and obtain your written consent that he may receive it.

Once you have picked appraisers whose services you want to consider, ask them for an interview. The goal of the interview is to find an appraiser who is going to meet your needs.

Asking questions of the appraisers you interview can help you understand how they might meet your specific needs. Questions you might find useful include:

  1. Does the appraiser have experience with other properties in your area and/or similar types of properties?
  2. What industry organizations does the appraiser belong to?
  3. How long has the appraiser been working in real estate appraisal?
  4. What education does the appraiser have?
  5. Area of specialty?

You should also feel comfortable asking more general questions if there is anything you do not know or do not understand about the process of hiring an appraiser and having an appraisal done.

Check references. Do not hesitate to ask an appraiser for references. A list of references you can contact to gain information about the quality of services provided by an appraiser is a good indication that previous clients have been happy with the work done.

Appraisers use selective market research and various analytical techniques to determine the market value of a property. Three different types of appraisals each require different information and techniques.

Sales data report. A sales data report is based solely on sales data and does not include a physical inspection of the property in question. Typically, a sales data appraisal report is used for residential properties located in low-risk, marketable areas.

Limited-restricted appraisal. A limited-restricted appraisal is a “drive-by” appraisal. The appraiser bases the appraisal only on the exterior appearance of the property. Such an appraisal contains more details about the neighbourhood and exterior of the property than a sales data report.

Full review. Also known as a full internal appraisal, a full review includes a detailed inspection of the interior and exterior of the property, as well as neighbourhood details. This type of appraisal may be required for:

  1. Private sales or for transactions not listed on a listing database
  2. High loan-to-value ratio
  3. Non-sales transactions, such as refinancing or renovation loans

An appraiser who signs a certification of value as part of an appraisal accepts responsibility for the appraisal and the contents of the report.

The cost approach

The cost approach estimates the cost to build a new building identical to the subject being appraised, at current prices, subtracting accumulated depreciation and adding the estimated land value. This approach is most useful when there are few comparable properties to be used for a direct comparison approach, such as with luxury homes or recreation properties.

This approach cannot be used to estimate the value of high-rise or townhouse condominiums.

In order to use the cost approach, an appraiser must:

  • estimate the value of the vacant site (land value)
  • estimate the cost of replacing the current building and add this to the land value to get the total value of the new building
  • estimate the depreciation of the existing building and subtract this from the cost of replacing the current building (the total value)
  • the end result is the market value for the building
The direct comparison approach

The direct comparison approach is based on the theory that an informed purchaser would pay no more for a property than the cost of acquiring another existing and equivalent property. The value estimate is based on the selling price and listings of comparable properties, and the appraiser makes adjustments, upwards or downwards, for elements that are different between the properties.

Suitable comparable properties should:

  • have sold recently (preferably within 90 days);
  • be from the same or a similar neighbourhood;
  • have similar lot size; and,
  • be of similar age/style/condition/size

Once an appraiser has determined which comparable properties will be used, adjustments are made to take into account features that differ between the subject property and the comparables. Positive adjustments are made to a comparable property in areas where the subject property is superior. Negative adjustments are made to a comparable property when the comparable is superior to the subject property. The final value of the subject property should fall within the range of values for the properties used in the comparison.

The income approach

The income approach relates to and is most often used for income-producing property, such as commercial or industrial. This approach is based on the theory that value is the present worth of the income stream which the property is capable of producing when developed to its highest and best use. The rental income that a property generates annually is calculated and annual operating expenses associated with the property are subtracted. The result is the net income from the property. The annual net income is converted to a single dollar value, which represents what this annual income in the future is worth today. This is the value for the property.

Some appraisals will use a combination of different approaches to value. Most often the decision of which approach to use depends on the purpose of the appraisal and the type of property.

Appraisers’ association in Alberta include the Alberta Association of the Appraisal Institute of Canada, the Canadian National Association of Real Estate Appraisers and the Alberta Assessors’ Association. Each of these associations sets their own standards for education and training required to become a member in good standing.

Appraisal organizations, such as CNAREA, often have their own codes of conduct for their members.

A lot of people can be involved in the purchase or sale of any one property and many of them have their own reasons for wanting it to be bought or sold for a particular amount.

A real estate appraiser will give a completely independent evaluation of a property’s value, independent from any transaction that may follow or result from their report

Sellers and buyers may wish to have an appraisal done for a specific piece of real estate, but for different reasons. An appraisal conducted by an authorized real estate appraiser can recommend to a seller the most effective list price to obtain maximum value. Though a real estate agent can also provide help in this regard, an independent appraisal is a further safeguard that a property will be priced appropriately.

On the other hand, a buyer may want to involve an appraiser for an evaluation of a property they are considering purchasing, because an appraisal report can help buyers ensure they are not paying too much for a property.

Whether buying or selling, consider using an authorized real estate appraiser as part of the process to protect yourself and your investment.

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