The Lowdown on Home Appraisals
October 21st, 2016
Buying a home is likely to be the largest single investment you will ever make, and whether it’s your primary residence or a vacation home, you and your mortgage lender, will want to know that the value of the property is in line with the amount you plan to pay.
This is where an appraisal comes into play. A real estate appraisal provides an estimate of the fair market value of a property and it can make the difference between getting that mortgage and having the financing fall through.
But there are other reasons you may want to have your home appraised, such as:
- Lowering your tax burden;
- Establishing the replacement cost of insurance;
- Settling an estate or divorce;
- Satisfying a government agency request, say for tax purposes, or
- Providing evidence in a lawsuit.
Mortgage lenders require appraisals to ensure that a property is worth the amount they are lending. Then, if a borrower defaults, the lender knows there is adequate collateral to recoup the initial investment.
As the potential buyer, you’ll pay for the appraisal. Costs vary widely, depending on the house, the province, the geographic location and the scope of the report.
Appraisers start by viewing the property inside and out to ensure that it is in a condition that a reasonable buyer would expect. The appraiser looks for any obvious features — or defects — that would affect the value of the house.
Once the site has been inspected, the appraiser employs one of two common methods for evaluating properties that are to be used only as personal residences and not to generate rental income.
The appraised value is determined by combining the value of the land with the estimated reconstruction cost of the home minus accrued depreciation. This method is most useful for new properties, where the costs to build are known.
The appraiser takes data on local building costs, labor rates and other factors to calculate the cost of building a home similar to the one being sold. The appraisal often sets an upper limit on what price the property could fetch. Such mitigating factors as location and amenities are usually not reflected in the cost approach.
If the appraisal comes in lower than the amount you were planning to finance, the bank isn’t likely to provide the full amount you were hoping for. Depending on your contract with the seller, you may be allowed to back out of the purchase deal or make a lower offer.
You could make a larger down payment in order to secure a mortgage the lender would be willing to extend, but then you risk spending more cash than makes you comfortable. If the appraisal comes in higher than expected, the seller generally does not have the right to raise the asking price.
Sales Comparison Analysis
This method compares the attributes of the home for sale with existing houses in the area that have similar attributes and have recently been sold. No two properties are exactly alike, so the appraiser compares the comparable properties to the home you are interested in, making adjustments to make the comparable homes’ features more in-line with the listed property. The result is a figure that shows what each comparable home would have sold for if it had the same features as the listed property.
Using knowledge of the value of such features as square footage, extra bathrooms, hardwood floors, fireplaces and view lots, the appraiser adjusts the value of the comparable home. For example, if a comparable property has a fireplace and the home you want does not, the appraiser may deduct the value of a fireplace from the price at which the comparable home sold. If the house you are looking at has an extra half-bathroom and the comparable home does not, the appraiser might increase the price of the other property.
This approach is generally considered the most reliable if adequate comparable sales exist.
In most instances when the cost approach is involved, the appraiser actually uses a mix of the cost and sales comparison approaches. For example, while the replacement cost to construct a building can be determined by adding the labor, material, and other costs, land values and depreciation must be derived from an analysis of comparable data.
If you are looking for an appraiser on your own, ask your real estate agent or use the search function on the website of the Canadian National Association of Real Estate Appraisers.
Preparing for an Appraisal of Your Home
If your house is being appraised, it is helpful to have certain documents available when the appraiser arrives, including:
- The most recent assessment from your local Municipality Property Assessment Corporation.
- A plot plan or survey of the house and land if available.
- The date you purchased the property.
- A list of personal property that will be part of the sale.
- Title policy that describes encroachments or easements and any written property agreements, such as a maintenance agreement for a shared driveway.
- A list of major home improvements and upgrades, when they were done, and how much they cost. Include permits if you have them.
- A copy of the current listing agreement and broker’s data sheet and purchase agreement if a sale is pending.
- Information on Homeowners Associations or condominium covenants and fees.
- A list of proposed improvements if the property is to be appraised “As Complete“.
You don’t need to accompany the appraiser during the inspection, but you should be available to answer questions and point out any improvements.
Make sure all areas of the home are accessible, including the attic and crawl space.