Faq

An appraisal is an opinion of value, as of a certain date in time, based on an analysis of market data. The process typically involves a physical inspection & written description of a property to confirm characteristics such as location, land & building size, condition, quality & design of construction, room count, etc. After inspection, the appraiser completes a written appraisal report, using a systematic routine including a thorough market review to reconciliation of the final estimate of value (described in further detail below).

This approach to value 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.

This method involves the direct comparison of a subject property to similar properties that have sold or are offered for sale in the same or similar market. These sales & listings are referred to as “comparables”.

The (best) most recent & similar comparables to the subject are analyzed. Where differences occur between a subject & comparable (i.e. larger/ smaller, older/ newer, better/ inferior quality, etc.) the

appraiser makes value adjustments based on market data, his/her knowledge & experience that a typical buyer would allocate to certain property characteristics.

After adjustments are made, the comparables will indicate a value range for the subject property. This value range is then reconciled into a Final Estimate of Value, considering market trends (are sales prices in the local market stable, rising or falling?) and whether the subject compares more closely to properties at the lower, middle, or upper end of the range. This is generally considered the most reliable & accurate method of determining market value.

Market value is defined as the most probable price which a property would bring in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, and assuming the price is not affected by undue stimulus.

There are three basic methods, known as the Approaches to Value, relied upon in the appraisal process, depending on the assignment/ type of property being appraised.

The premise of the cost approach is that a prudent buyer of real estate would not, or should not, paymore for a property than it would cost at current prices to create a substitute with similar utility; to acquire a site and construct equivalent improvements without undue delay.

The replacement (or reproduction) cost new of construction minus depreciation, plus market value of land, derives the market value estimate. This is based on the assumption that there is a sufficient supply of buildable land available.

The first step is to estimate land value as though vacant, considering highest and best use. This is done by using the direct comparison (sales) approach for vacant land.

The second step is to estimate the replacement or reproduction cost new of the improvements (home, extras), based on current market costs. This can be estimated based on researching actual construction budgets, using costing manuals, etc.

The third step is to consider depreciation applicable. Depreciation is a loss in utility and therefore value due to any cause, categorized as physical, functional & external (locational). If the building improvements are not new, there is physical depreciation

(deterioration).

In a summary appraisal report format, this depreciation is usually shown on an “age/life” basis. A standard home may have a total, estimated life span of 60 years. If the home is estimated to have an effective age of 20 years, with 40 years remaining economic life span, then the home is shown as being 33% depreciated.

Functional depreciation is a loss in value due to aspects of design (resulting in a defect or obsolescence).

Locational depreciation is a loss in value caused by a negative influence emanating from outside the property.

It is generally considered that the cost approach gives a better indication of market value when the property in question is new and an appropriate (highest and best) use. Generally, the cost approach becomes less reliable for older homes due to the difficulty in estimating accrued depreciation.

The Income (Capitalization) Approach:

The Income Approach is utilized in commercial income producing real estate appraisals and is based on the theory that market value is related to the worth of future income stream that a property is capable of producing when developed to its highest and best use. The income is capitalized into a value by an appropriate method and rate.

Note: The appraiser reviews the appropriateness of the approaches and the indicated values derived before reconciling into a Final Estimate of Value (Appraised Value).

Each property is different, but generally, an appraisal inspection of a standard sized, detached home takes 45-60 minutes. Larger homes & parcels take longer to inspect, often one hour+. Apartments & town-homes take less time to view, depending on size & configuration, from as little as 10 minutes up to 45 minutes.

Once a property is inspected, turn around time for a finished appraisal report is typically within 24-48 hours. This depends on several factors, including the complexity of the report, the volume of reports appraisers in the firm are working on at the time, etc. Appraisal orders are usually done on a first come, first serve basis, however, priority is given to urgent orders, such as purchase financing appraisals with quickly approaching subject removal dates, etc.

For a typical appraisal, the appraiser does an inspection of the site and buildings, observing characteristics such as location, view, site size, utility & topography, home size, room count, age, condition (physical & functional), quality & design of construction & finishes.

Photographs are taken of both the interior & exterior. To confirm home size, the appraiser will take measurements, or in some cases review building plans.

The owner does not need to be present for the appraiser to inspect a property as long as there is an alternate way to gain access. Access details will typically be confirmed when the appraiser calls to set up an appointment to view the property when the appraisal is ordered. If owners are not available, access can be set up through tenants (tenants require minimum of 24 hours notice), property management, key obtained (lock box, sent/ picked up, hidden location, etc.), etc.

If there is a security system armed, the appraiser will require the code to disable, then reactivate.

As per professional appraisal (practice) standards, the definition of *client* is generally the party ordering the appraisal report from the appraisal firm. This is regardless of who pays for the work ordered.

For example, If a report is ordered by and addressed to a bank, then that bank is the client, and they own the rights to the appraisal. The appraiser is not authorized to release that report (or conclusions held within) to any party without the express permission of the client.

 Some lenders may release of copies of reports to owners, while others have a policy not to. Some lenders, if they do not proceed with financing, may choose not to release the appraisal for use by another lender.

If a report is addressed to a mortgage broker or property owner, then they own the rights to the report, and they will generally require a letter of transmittal (release) for the report to be used by a lender for financing purposes.

For specific questions in regard to lending policy, or questions pertaining to reports addressed & submitted to your financial institution, please contact your lending representative.

How your home shows makes a difference to the value. Think of the impression that a potential purchaser would have when viewing your property. Seeing it neat & clean, uncluttered, and generally inviting creates a good impression.

Simply preparing the property as noted above is the best investment, likely with little cost. Fresh paint also can be a low cost upgrade which is well worth completing.

For more substantial upgrades, or renovations, some items offer better

return than others.

Components in a home (i.e. flooring, windows, furnace, roofing, fixtures, etc.) each have a useful life span, and the closer to the end of an item’s lifespan, the better investment. It is to replace that

item. This is both in a functional sense, for your use & enjoyment of the property, and to increase the market value.

Kitchens & bathrooms are always a popular choice, as these rooms are so prominent in a home. Renovating these areas is usually quite costly, but could be well worth planning.

Curing a functional deficiency within a home often results in good return on investment.

An example of this could be to add a second bathroom in a four bedroom home currently with only one bathroom. Today’s market would find only one bathroom inadequate, or at least much less desirable than having two.

A good resource offered by the Appraisal Institute of Canada (AIC, is the Renova web based guide to home renovation values, available at the following link:

The Appraisal Institute of Canada has developed RENOVA, an interactive web-based guide to the value of home improvements. RENOVA is designed to give consumers a better idea of the return on investment they can expect for a variety of home improvements. RENOVA does this by providing a payback value range derived from the cost of the improvement expressed in dollars. For example, a homeowner might indicate that he or she is considering spending $10,000 on remodeling the kitchen. RENOVA will then

provide a payback amount of between x and y dollars for that particular renovation. Homeowners can choose from among the 20 most popular renovation improvements, identified by a survey of AIC members.