Wednesday, 12 August 2015

Appraisals: Do I Need One?

Property Appraisals: 101

 When do I need an appraisal?

There are a few situations during either a property purchase or a refinance during which you may be asked for an appraisal of your home and property. While there is no guarantee as to whether a lender will ask for an appraisal or not, here are the most likely scenarios where they will usually be required:

  • Purchase with 20% or greater down payment.  
  • Refinancing or taking out existing home equity 
  • Reverse mortgages(See this article about CHIP reverse mortgages)
  • Rural or unusual property types 

The reason for requiring an appraisal is to give the lender reassurance of the property's fair market value. A good appraisal is an honest, unbiased representation of what the property is worth.

Why isn't an appraisal required with less than 20% down?

In this case, the lender will be backed by one of the mortgage insurers(More info about mortgage insurance HERE), such as CMHC, Genworth or Canada Guaranty. The mortgage insurers have a sophisticated property valuation tool and in most cases can verify a property's value through their existing information. In the case where they don't already have this information, the insurer will actually request an appraisal, but it will be done at their cost, not yours.

How is an appraisal performed?

An appraisal is performed by a licensed appraiser who is certified by the Appraisal Institute of Canada. The appraiser will start by assessing the location, age, and other basic information about the home to begin filling in the information and the calculations required. Once they have the basic info in place, they will visit the property to inspect the condition, layout, etc., and to take multiple pictures of the home to document their visit.

With all the information in hand and the site visit complete, the appraiser will take some time to complete calculations using one or more of the following methods:

Direct Comparison Approach: This approach compares the subject to similar properties that have sold, are for sale and that have expired and estimates a value based on the market comparables. This is the typical approach for a residential property, in which similar sales are considered and adjustments for differences are made based on market evidence of factors that influence purchase decisions – for example, finished basement versus an unfinished basement.

Cost Approach: This approach estimates the cost to replace or reproduce the property, then applies depreciation for a number of components (physical, functional, external obsolescence, etc.)

Income Approach: This approach estimates the potential income of the subject and applies the appropriate mathematical function (capitalization rate, Gross income Multiplier, etc.)

 Often your appraisal will use 2 of the 3 methods, in order to offer a range of value depending on the purpose of the appraisal(Is it for a mortgage? Home insurance?). This information is then bundled up and sent off to whomever has ordered the appraisal.

***Important consideration: If the lender is requiring an appraisal solely for their benefit(i.e. for mortgage approval), you will probably not receive results, only an approval or not. If you are interested or require the information for yourself, you will be responsible for ordering and arranging your own inspection for your private use. A good example might be if you are wanting to sell your home privately and want an idea of where to set your asking price.

If you want to learn a little bit more about appraisals, I work with several reputable companies and would be happy to suggest one to suit your needs. Get in touch with me anytime, I'm here to help!

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