What is an appraisal?
An appraisal is an opinion of property value based on research conducted by a professional appraiser. The report presents the fair market value of a house based on comparable sales, condition and location of the property, size and number of rooms and type of construction.
Appraisals are generally done in connection with mortgage financing and the price used is a base to determine how much money to lend. Banks and mortgage lenders don’t want to loan out more than a property is worth. If the appraisal comes in at less than the sale price of the home, concessions will be necessary. The seller may have to lower the price, the buyer may have to offer a larger down payment or a compromise may have to be reached.
The appraisal process can seem confusing to the average homeowner, but it needn’t be. Appraisers in Canada follow a set of generally accepted appraisal guidelines and practices, known as USPAP, Uniform Standards of Professional Appraisal Practice, which govern the ethical and legal aspects of the appraisal reporting process.
For the homeowner, however, generally the most important aspect of the appraisal is learning the estimated value of their home and understanding how that conclusion was reached.
The viewing of the home is usually the most important part of the appraisal process; however it takes the shortest amount of time in most cases from 5-15 minutes for an apartment, to 15 to 40 minutes for a home, depending on the size, the features, the floor plan, and the condition of the home.
How is the Market Value Determined?
Appraisers use the following approaches to value depending on the assignment.
The Direct Comparison Approach
Once the inspection is completed, the appraiser will compare your home to recent sales, generally 3 – 6 months, and ‘active’ listings currently on the market, in your neighborhood. These sales are called comparables. Ideally, the appraiser would like to find a home exactly like yours right next door to yours. However, this rarely happens. The appraiser will compare your home to homes that are as similar as possible. Similarities include but are not limited to: date sold or listed, sale price/list price, square footage, bedroom/bathroom count, age, appeal, parking, basement suite/finishing, condition, quality of materials used in construction and amenities. Where differences occur, the appraiser makes adjustments. These adjustments are based on the appraisers experience with and knowledge of the market and what value the typical buyer would place on a given amenity. After the adjustments are made, the comparables will indicate a value range. This value range is then narrowed to the Final Estimate of Value based on market trends (are sales prices in the area stable, rising or falling?) and whether your home compares more closely to homes at the upper, lower or middle of the range.
The Cost Approach
The appraiser has also estimated the Cost to Construct your home on your lot using the same materials as are present in your home.
This Cost to Construct is based on residential cost handbooks and the appraiser’s knowledge of local building codes and labor rates. The cost to construct a replacement home is based on providing a similar home with the current building standards, with an unfinished basement. Then the cost of completing the basement is added, usually because basements were not developed at the same time as the rest of the house and are usually of lesser quality. This amount is depreciated by the appraiser for the physical life of the property. For example if you home is built on the west coast, it can have a 60 year life, and if the home has 30 years life remaining, it will be depreciated by 50%.
This is added to the estimated value of the lot if it was vacant, plus other minor additions, such as landscaping, and the value of the detached garage, if there is one. The Cost to Construct ideally should fall within the value range indicated by neighborhood sales, however as the home gets older, this method is generally considered less reliable.
The Income Approach
The Income Approach is one of three major groups of methodologies, called valuation approaches, used by appraisers. It is particularly common in commercial real estate appraisal and in business appraisal. The fundamental math is similar to the methods used for financial valuation, securities analysis, or bond pricing. However, there are some significant and important modifications when used in real estate or business valuation.
While there are quite a few acceptable methods under the rubric of the income approach, most of these methods fall into three categories: direct capitalization, discounted cash flow, and gross income multiplier.
The Client & The Final Report
The appraiser follows guidelines and uses knowledge based on continuing classroom education and experience in the field to arrive at a logical conclusion regarding the value of your home. We hope this brief overview has answered your questions about the appraisal process and the way in which the Final Estimate of Value is determined. However, if you have any unanswered questions, you may direct them to your loan officer, or if you hired the appraiser, you may contact the appraiser.
After the appraisal is completed, it is submitted to the Client. The client can be a person or institution. By law, the appraiser can discuss the particulars and outcome of the appraisal with the client only. If the appraisal was ordered by your bank/mortgage company then they are the client and “own” the appraisal. (Your loan officer can inform you as to any specific requirements your bank/mortgage company may have about receiving a copy). Any questions you have regarding the appraisal itself may be directed to your loan officer who will, in turn, contact the appraiser if further clarification is required.
How long does it take to view my house?
An average house takes approximately 1/2 hour to view inside and out. The bigger the house and the more complicated the floor plan, the longer it takes.
How long does it take to get the completed report?
The report can usually be done within 24 hours from the time of the inspection.
Other then selling your house, why do people get an appraisal done?
Appraisals are done for many reasons such as:
- for sale by owner
- estate planning
- tax reporting (i.e. change of a principal residence into an income property)
- job transfer
- equity takeout for renovations
- replacement cost for insurance
What do you look for when doing an appraisal?
The general condition of the property is taken into consideration, both inside and out. Each room is inspected and items such as carpet, type of windows, cabinets, number of bathrooms, heating, capacity of hot water tank, and power panel are noted as well as the amount of basement finish.
What should I do to prepare for the viewing?
As a general rule, we suggest you prepare your house as if you were getting company and they would be going into every room of the house. Turn on lights and open curtains. Look at this inspection as if you were trying to sell me the house. If you have done some upgrading such as a new roof, new furnace, carpet, cabinets, be prepared to let me know the general dates that this was done.
Do I have to be there when the appraiser views the property?
It is not necessary to be home when the viewing is done, however, I will need access with a key. It is not advisable to leave the home unlocked or to leave the key hidden.
I work every week day until 5 and would really like to be there when the appraiser comes.
If absolutely necessary, the inspection can be done on Saturday. Inspections can be done later in the day during the summer but not in the winter due to shortened daylight hours.
Appraiser jargon! I have read my appraisal…what do these terms mean?
Have you heard an appraiser use any of these terms? Did you just hear one of our appraisers use it and you came here to figure out what it meant? We don’t mean to speak a foreign language, but any profession has its jargon. Here are some examples of common appraiser jargon and their meanings:
Adjustment. When comparable properties have been identified, the appraiser adjusts the value of the subject property according to differences in living area, acreage, frontage, amenities and the like. This is where the professional expertise of an appraiser is most valuable.
Chattel. Personal property that may be on the subject property but which does not figure into the opinion of value in the appraisal report.
Comparable or “Comp”. Properties like the subject property nearby which have sold recently, used as a basis to determine the fair market value of the subject property. The Uniform Standards of Professional Appraisal Practice (USPAP) establish clear guidelines for comparable selection.
Drive-by. No interior inspection is completed. An appraisal that is limited to examination of comparable sales and a determination that the property is actually there and has no obvious defects or damage visible from the outside.
Fair market value. The appraiser’s opinion of value as written in his or her appraisal report should reflect the fair market value of the property — what a willing seller would pay a willing buyer in an arm’s-length transaction.
GLA. “Gross Living Area,” the sum of all above grade floor space, including stairways and closet space. GLA is often determined using exterior wall measurements.
Latent defects. A defect on the property that is not readily apparent but which impact the fair market value. Structural damage or termite infestation might be examples.
MLS. A Multiple Listing Service is a proprietary listing of all properties on the market in a given area and their listing prices, as well as a record of all recent closed sales and their sales prices. Created by and used primary by real estate agents, many appraisers pay for access to these databases to aid in comparable selection and adjustment research.
Obsolescence. The value of assets diminishes as their capabilities degrade or more desirable alternatives are developed. Functional obsolescence is the presence or absence of a feature which renders the property undesirable. Obsolescence can also occur because the surrounding area changes, making a feature of the property less desirable.
Subject. Short for the property being appraised — the “subject property.”
Useful life. The time during which a property can provide benefits to its owner.
USPAP. Short for Uniform Standards of Professional Appraisal Practice, USPAP promotes standards and professionalism in appraisal practice, and is often enacted into law in a state. It is promulgated by the Appraisal Foundation, a non-governmental entity chartered to, among other things, maintain appraisal standards.
Walk-through. An inspection that includes a visit to each part of the interior of the house used in estimating value.