Understanding appraisals

Some lenders require an appraisal to provide mortgage financing

If your client is a first-time buyer or even a seasoned purchaser, it may benefit you, as a REALTOR®, to understand the nuances of appraisals. Most lenders will require an appraisal of a property for mortgage financing purposes, although the process is not always well explained to the customer, agents or other parties involved in the transaction. The following provides an easy-to-understand overview.

What is an appraisal?

It is a formal opinion of value prepared as a result of a retainer intended for reliance by identified parties, and for which the appraiser assumes responsibility. It is conducted by an appraiser and presented usually as a written report. When requested by a lender in the mortgage process, the appraisal report is owned by that lender, even though the home buyer often pays the cost of the report as part of the closing costs of the mortgage. The appraisal report is an integral part of the documentation required by a lender to meet its regulatory requirements for financings that are secured by real property.

Who manages the appraisal process?

Most large lenders in Canada outsource the management of the appraisal process to a company that specializes in the management of appraisals. These third-party companies are called Appraisal Management Companies (AMC). Centract Settlement Services is an example of an AMC. We manage over 1400 appraisers across the country, and provide technology to enable them to create standardized high-quality reports ensuring the lenders’ requirements are met.

For an appraiser to provide services to an AMC and large lender, they must be an accredited member in good standing with one of the three professional associations in Canada: the Appraisal Institute of Canada (AIC); the Canadian National Association of Real Estate Appraisers (CNAREA); and the Ordre des Évaluateurs Agréés du Québec (OEAQ).

How is an appraisal done?

An appraiser gathers information on the subject property so that he or she can compare it to the sale prices of similar properties. General information is gathered from various market sources, such as zoning, official plan, building departments, assessment, and local MLS services. Specific information regarding the subject property such as location, condition, amenities, size, etc. is gathered by the appraiser during a home inspection.

An onsite inspection typically takes 20 to 30 minutes during which the appraiser will find out important attributes of the property such as its date of construction, recent updates, age of roof, wiring, plumbing, etc. In addition, the appraiser may ask for documentation such as a municipal tax assessment bill, deed or title report showing the legal description, a survey of the property and if renovations have been completed, the scope of work and costs.

What are the different approaches to valuing a property?

The Sales Comparison is the most commonly used in residential property appraisal and uses comparable recent sales to determine market value.

The Cost Approach estimates the replacement cost of the subject property at current prices, subtracting accumulated depreciation and adding the estimated land value.

The Income Approach is used for income-producing properties and values the property at what it is capable of producing when developed to its highest and best use. The net operating income is capitalized into value by an appropriate method and rate. This approach to value is rarely used when appraising a single family residence.

What kinds of appraisals are there?

A full appraisal is an estimate of market value based on a comprehensive report that includes a physical inspection of the property. A full appraisal typically takes three or more days until it is completed, as it largely depends on the availability of the homeowner and complexity of the assignment.

A drive-by appraisal is where the appraiser uses the exterior condition of a property as a proxy for the

condition of the interior and relies on outside sources of information such as municipal records, office files, etc. to obtain the age, size and other characteristics of the home. A drive-by appraisal typically takes two days or less.

A desktop appraisal provides an estimate of the market value of a property where the property is not physically inspected and all data supporting the valuation is from reliable third-party information. Turnaround on a desktop can be as fast as a few hours.

What are the uses of appraisals?

The majority of appraisals in Canada are for mortgages. Other reasons for appraisals include divorce or estate settlement, disputing a tax assessment, a foreclosure or to facilitate a real estate sale.

For more information, please visit www.centract.com

Phil West is President of The Home Inspection Network and Centract Settlement Services. Centract is a Brookfield company and the largest Canadian provider of outsourced appraisal management and mortgage-related services as well as real estate business intelligence to financial institutions, real estate professionals and consumers.

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What’s the difference between an appraisal and other valuations?

Report Type By Whom Purpose

Appraisal

An appraiser For lending risk purposes

Tax Assessment The tax assessment authority Determining tax due

Comparative Market Analysis (CMA) A real estate agent Determining listing price

Home Inspection A home inspector Determining safety and working order of a home

More details

An appraisal is an unbiased estimate of the value of a parcel of real estate. If ordered by a lender for lending purposes, it is reference. MPAC reviews property sales within a neighbourhood to determine the assessed value of a property. The Municipality then applies a mill rate to determine the amount of taxes to be paid. A CMA is what a real estate agent recommends as the probable sales price for a given property. It is in anticipation of obtaining a listing for a property and is based on a survey of like properties. An in-depth, third-party evaluation of the accessible structure and mechanical systems of a home, such as roof and plumbing, that determines if they are in good working order and safe; identifies structural problems or other defects and notes any repairs that may be needed, when they will most likely be needed and may include an estimate of these costs. It does not provide a value on the home.