There are occasions when it will serve you well to find out exactly what your home pragmatically worth via a credible certified property appraiser - no emotion involved. Keep in mind, this sum may not be the amount you might achieve when you list your home for sale, because value (or “worth”) in the context of a sale is dictated by market conditions (i.e. what actively-engaged well-informed motivated Buyers are willing to pay for your property at that specific moment in time relative to the supply and demand of similar properties offered for sale). That said, understanding what your dwelling’s true asset value is based on a data-driven process and comparative analysis is wise in terms of understanding the wealth you have genuinely accumulated in your real estate investment.
When Do You Hire an Appraiser?
There are many circumstances in which a formal appraisal may be required or appropriate. For example, when you have purchased a property conditionally on securing satisfactory financing your lender will likely order an appraisal as part of their due diligence to ensure the property is worth the value that you're paying, or at least the total of the mortgage debt plus costs to ensure they're secure in recovering the funds, in advance of issuing mortgage approvals. Furthermore, they may also have one completed when your mortgage is up for renewal or, if you're considering a new lender, they may want to complete an appraisal to ensure the veracity and value of your property.
You may personally want to get your residence appraised after you've completed substantial renovations and/or additions, to be informed of what your “new” home is worth, and to inform your property insurer so the policy covers all your new improvements (btw, here's my post on 14 Property Features That Increase Your Insurance Premiums). If you are seeking a property tax appeal, you will benefit from having an appraisal completed with the information on hand.
Homeowners looking to do retirement planning or estate planning may seek a home appraisal so that they know exactly what their home is worth in terms of their overall investment portfolio. This helps to understand your real estate wealth as a portion of your assets and to diversify your holdings according to your goals, to ensure that you have the right balance of liquidity and longer-term investments on hand. A family may get an appraisal complete as part of an Estate Sale, especially if a family member is wanting to purchase the property from the Estate or Trust. or a property investor might have an appraisal done to help determine what capital gains tax you will be obliged to remit to Revenue Canada.
In all cases, hiring an appraiser gives you an independent assessment of what your home is worth.
Choosing The Right Appraiser
First, it's important to understand that no lenders will accept an appraisal ordered by a seller and provided to a lender to demonstrate the veracity of the value of a property they own. Basically, it's considered a conflict of interest. In fact, if your goal is to determine what the value of your property is for the purpose of financing, the only way to get an appraisal that a lender will consider is for that specific lending institution to arrange it from their roster of vetted firms. The intention here, of course, is to have a third-party, research and provide a bonafide opinion of the value of a property.
Lenders will often make the property owner pay for the appraisal - which can cost upwards of $2000 - but if the report is being generated for financing, it still remains the property of the lender. At most they might tell you what sum the appraisal came in at, but don't anticipate receiving a copy of it.
Depending on the appraiser, on occasion, they do share this info, but it isn’t industry standard. One way to learn in greater detail about the influences for value in your particular home (i.e. deficiencies is to accompany the appraiser during the inspection through your home) and ask questions. This isn’t “official” but it can give you a ballpark idea.
If you are seeking an appraisal for another reason other than financing, you can certainly seek out your own contact.
When looking for a professional, it is a good idea to consult the governing association. That way you can connect with people who are properly accredited and therefore accountable for their work. You can consult the Appraisal Institute Of Canada or the Canadian National Association of Real Estate Appraisers to find someone in your area. And like with when seeking other professional services, seek references and reviews. And ensure you sleuth someone who knows your location.
While overall the appraisal industry is credible, I also think it can be a bit of a crapshoot. For example, if the appraiser lives in Oshawa and typically appraises suburban housing built in the last 20 years, but is tasked with appraising an Edwardian fixer-upper with incomplete renovations in an up-and-coming downtown Toronto neighbourhood for a buyer who competed for it in a bidding war, they may not understand the nuances of that property market to accurately establish an appropriate value. The potential outcome? The appraisal is tens of thousands of dollars lower than the Buyer's purchase price which jeopardizes their capacity to secure a conventional mortgage.
It’s a good idea to find someone who has experience in your property type and in your specific area. Ask questions of the appraiser based on what your goal is for your appraisal. For example, if you are seeking a property tax appeal, you will want to work with someone who is familiar with your municipality and the rules.
Another thing to note, the appraisal fee is generally dictated by the process (and the complexity) of the appraisal, rather than by the value of the property. And it is usually a flat fee.
How Do You Prepare For An Appraisal
For homeowners, similar to when you prepare your home for sale to get top dollar from buyers (i.e. declutter, paint and tend to minor renovations, staging and creating curb appeal) - here's Urbaneer's How To Prepare Your Home For Sale - there are things that you can do to help your home be appraised at a higher or lower value.
Be candid, informed, and straight-forward. Just as you would disclose the state of condition to your realtor, the idea here is to communicate the truth about the location, condition and size of your property and its structures. Try to look at your home with a critical eye as an appraiser would base on what you see and the message of value that is created.
Every opinion - even the most informed appraiser - remains subjective. As a realtor taking prospective purchasers through a property offered for sale, I often find when the Sellers are present, they tend to 'oversell' their property. Be forewarned, from the looks on the faces of my Buyers, I can assure you if you're trying too hard it may not serve you well, and I'm sure the same likely applies to appraisers. Whether you're attempting to demonstrate your pride of ownership or, alternatively, if you're trying to secure a low appraisal by pointing out everything that's wrong and nothing that is right, I recommend you be subtle and casual in what you communicate, regardless of your personal objective.
In my post Understanding The Six Essential Layers Of Property, you'll find my guide on what factors serve as touch-points for an appraisal. Depending on your goal, if you're seeking top dollar pay special attention to curb appeal, landscaping, and having your property well-lit and manicured. Alternatively, an overgrown yard and forlorn exterior facade will not only give a bad first impression, but it will negatively impact value.
Take a tally in detail of any and all upgrades that you’ve done to the home structurally and cosmetically during your ownership, with dates included as well. There are a number of housing components that have a limited life span; if you’ve replaced things recently and can expect a significant amount of time remaining in their life span (i.e. roof, windows, wiring, plumbing, heating and cooling) this can help ensure a more specific value, so make sure to provide these details to your appraiser. If you have before and after photos, even better. Get past permits, approvals, and any other relevant documentation organized.
If you are really looking to boost your home’s value prior to an appraisal, you can always consider doing a refresh. Realize that certain home projects will drive greater return on investment than others. Some are big jobs. Others are smaller. The Appraisal Institute of Canada recommends upgraded kitchens and bathrooms, flooring, windows, doors and fresh paint as ways to help with value.
Consider what you love (or don't love) about your home and communicate that to the appraiser. Although they follow a pretty specific process, it is worth pointing out the attributes (and potential deficiencies) of your property. If you're fully engaged with the real estate market, it doesn't hurt to be versed in the recent comparable sales of properties in your neighbourhood, so that you know roughly what ballpark yours may be worth. From experience, I've found if you can demonstrate an awareness of what you believe your property to be worth, and you can articulate it to an appraiser by citing recent sales, you're more likely to see the appraisal report reflect a value within close range of your estimate.
There Are Different Approaches Used By Appraisers Depending On The Property & The Objective
The truth is, there may be an occasion when your lender’s appraiser sets the value of your property far lower than you thought fair. Or your insurance company offers a policy that barely covers your decade’s worth of improvements. Or the appraised value doesn't align with the sale price your neighbour recently achieved a few doors down. The reality is, in the complex world of real estate, there are a number of bonafide approaches that can determine the value of a property. Each approach has its merits, though the end opinion on how much your property might be worth can vary dramatically. Here are the three different approaches to valuing real estate:
º Market Value Approach º
In the market value approach, recent sales of matching properties in a similar location set a tangible framework for comparison. Sales of similar units in your building, or of houses on your street, are used to start. Then, properties having the same size and features, like private parking or comparable renovations and upgrades, are integrated into the analysis. Further to this, adding properties with similar intangible benefits like vistas, architectural merit, or additional accessory income (like a basement apartment) refine the value matrix and effectively establish the market value of the property. This analysis is subjective, as it estimates a value for the intangible qualities your property may have that others don’t, although the appraiser does use a set of criteria to determine value in the home, in an effort to create some objectivity.
As an aside, there are other ways that a home’s value is determined other than the market value process that an appraiser uses.
º Cost Approach º
The cost approach, which is used most often by insurance companies, calculates the actual real costs associated with property development. Basically, the evaluator takes the cost of all components which make up your property…the land value based on its location, the cost to build a property similar in size and finishes and the cost of upgrades specific to your property like landscaping or a swimming pool. After discounting the property for age and pending repairs, one can establish the replacement cost of your property. As the market value approach, it does not take into account the intangible features of a property, like historical ambience, unique setting, views and vistas, or in some instances, neighbourhood prestige or building reputation.
º Income Approach º
In this instance, the property’s value is analyzed based on the existing or projected rents the dwelling could generate. By adding the total income flow and deducting all the operating expenses (property taxes, building insurance, utility costs, repairs and maintenance, and some allowance for possible vacancies), one can determine the net income. Allowing for a reasonable rate of return on the capital investment required (a reasonable rate of return is generally more than those generated in secure investments like money markets but less than higher-risk stock ventures), one can establish a financial value for the property. In this instance, absolutely no emotion is involved to determine a sentiment-free value. A bank might use this prior to approving a mortgage for the property in question for determining value as an income property.
My Own Experience From The Real Estate Trenches
In the 1990s when I was predominantly selling Innovative Spaces, such as loft conversions, corner grocery store retrofits, quirky lane homes, and architect-design infill dwellings, the lack of comparable sales was always challenging for the appraiser. What did they do? They called me and ask for guidance, and I would share with them all of the recent sales of unusual properties that could serve as barometers of value based on their features. In other words, I, as the listing realtor, would provide the comps to the appraiser so he had accurate information to complete his appraisal. Because those kinds of unique urban spaces are few and far between, and the MLS system doesn't have any designations or fields to distinguish their unusual qualities, it's very difficult for an appraiser to find similar sales. As a result, they needed guidance from me.
A Recent Personal Undertaking
I was recently exploring refinancing my duplex with a new lender at the same time my mortgage was up for renewal. The new lender gave me an attractive pre-approval with the standard 18 conditions that accompany such paperwork. In reviewing the document the next day I identified and disclosed immediately to my representative those conditions which I knew I couldn't satisfy. For example, one condition was providing copies of the rental leases for my Charlottetown triplex. I didn't have any because, for the past 8 years, I have rented the suites as short term furnished accommodations for terms ranging from one week to nine months. Why? Because my priority is to ensure the property - which is my vacation home - is available for my own personal use - in addition to my family and friends - throughout the year. In other words, I placed tenants in the property when I wasn't visiting it.
To demonstrate credibility I provided all my bank deposit statements, a rental record of every booking, and an income and expense summary, so the lender could see how it had been consistently operated as an income-slash-vacation-property for several years. And I explained to them that if they didn't consider this information satisfactory then we could stop the refinance application immediately.
Instead, the lender said it had to go through the appropriate channels which would take some time, but they were optimistic, while they encouraged me to proceed with the $1400 appraisal (which was at my own expense). Several weeks later, the lender came back with a mortgage approval but stated that because the Charlottetown property is not rented to long term tenants (which, if it was, would effectively render the purpose of my vacation property null and void) they would only proceed providing they charged a significantly higher interest rate because it was deemed a higher risk.
Argh! I was so annoyed. And given the interest rate with my existing lender was much more attractive, I rejected their financing package and renewed my mortgage.
I reached out to my representative and requested a copy of the appraisal which, while effectively worthless as no other lending institution will consider it credible, was better in my possession than the lenders. But it wasn't forthcoming. And it irked me because not only did it make the $1400 cost feel like a complete waste of money with nothing to show for it other than an exercise in futility, but it felt like the financial institution didn't even value what that sum of money represented to me. Which was a lot of hard work!
A day later I emailed my representative asking them to send me the Authorization Form where I was acknowledged that I wouldn't be getting a copy of the appraisal despite the fact I was paying for it. Having not signed one (or anything actually), they promptly sent it to me.
Alas, behold my bitter outcome on the appraisal process.
A Letter Of Opinion
This is a good opportunity to bring to your attention that you may be better served to bypass the expense of an appraisal and enlist the services of a real estate broker or salesperson who can conduct a Market Value Assessment of your property and include a letter that briefly provides their Opinion of Value in written form. In fact, you might consider asking a few realtors for Letters Of Opinion on the value of your dwelling. It should cost anywhere from $250 to $500, and while it isn't as formal as an appraisal it could be helpful. For example, in the case of a couple getting divorced, each one of the pair might choose their own representative - and possibly a mutual third to get three values and then see how they range. It may be enough information from which they can proceed in splitting the asset.
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