When you
are buying a home both you and your lender
will want to know, if you are paying the
market price for your home. Additionally,
you will want to confirm if the condition
of the home is as good as you think and
at least to the standard presented by your
vendor. To best determine the value of the
home you will need a professional third
party appraisal which is required by a lender
to determine the lending value of your home.
In order to determine the condition of the
home you are purchasing it is highly recommended
that you consult with a reputable qualified
home inspection company.
Appraisal
A real estate appraisers job is to determine
the value of the property. Most lenders
will require an appraisal as part of the
approval process. An appraisal is “an
estimate or opinion of value” usually
given by a licensed real estate appraiser.
The appraiser will gather and analyze data
of the local market and utilize their experience
in developing a final estimate of the property
value. The appraiser most often will visit
the property for a visual inspection take
a physical inspection of the grounds to
verify the size of the property as well
as an interior inspection to confirm and
comment on the physical make up of the home
including the number and types of rooms
and the overall appearance of the property
inside and out. In preparing a report for
lending purposes the appraiser has many
considerations that need to be researched
and addressed:
General Information — Legal description,
real estate taxes, and zoning information.
Neighborhood Analysis — Density, growth,
price stability, and nearby land use.
Description of Improvements — Size,
design, number of rooms, construction quality,
condition, and amenities.
The appraiser will usually look
at 3 approaches to value starting
with the “Market Value”. Market
Value as defined as “the most probable
price which a property should bring in a
competitive and open market under all conditions
requisite to a fair sale — the buyer
and seller each acting prudently, knowledgeably,
and assuming the price is not affected by
undue stimulus”.
A second approach is the “Comparable
Sales Approach” which is
the most common method for appraising residential
properties and considered the most valid
for lending purposes. Using this method,
the appraiser selects similar properties
that have recently sold (usually within
six months) located within the subject neighborhood,
or in neighborhoods similar to those of
the subject and adjusts the prices to reflect
differences between the comparable properties
and the subject property.
The “Cost Approach”
is another method used. This method estimates
the cost to reproduce the structure new,
then the appraiser subtracts from the cost
for depreciation, from age and physical
deterioration. Next, any loss of value due
to functional and economic obsolescence
is subtracted. then finally, the fair market
value of the land, plus any improvements
to the site are added. The cost approach
is most valid for appraising new homes,
since there is no need to estimate depreciation.
The third approach to estimating value is
the “Income Approach”.
This technique evaluates the income stream
derived over the life of a property. The
income approach is most valid for income
producing properties such as multi-family
dwellings. The appraiser evaluates these
methods, weighing the most reliable approach,
in deriving the final reconciliation of
value. Please note that appraisals are generally
required by all lenders and although some
lenders will complete the appraisal at their
cost, this is not the case with most lenders.
Be prepared to pay around $200 for an average
residential home and more for other types
of property and larger luxury homes.
The mortgage professional assisting you
is a great resource when it comes to arranging
for an appraisal and shopping for the best
appraisal price when required. Please note
further that each lender maintains a list
of approved appraisers. Therefore, do not
take it upon yourself to order an appraisal
for lending purposes until you have confirmed
that
a) a lender has issued
a commitment subject to appraisal and,
b) that the
appraiser used is on the approved list of
the lender.
There are also various designations denoting
the qualifications of the appraiser which
may be required by a lender. For instance
some lenders may require that the appraiser
have at least a CRA designation for residential
appraisals and an AACI designation for commercial
or mixed use properties.
The appraisal is generally part of the mortgage
process that your professional mortgage
advisor will share with you and make the
necessary arrangements so that you don’t
make what could otherwise be a costly mistake.
Please see the Real Estate Services Directory
in order to locate a real estate appraiser
near you and you can find a professional
mortgage consultant in any of the various
mortgage services directories accessible
from the “Directories” page
at this internet location.
For more information on appraising your
home or other real estate visit the
Appraisal
Institute of Canda
Home Inspection
The home inspector offers no opinion on
the value of the property. Their function
is to inspect the adequacy and condition
of the building and all major systems. A
home may be of sufficient “appraised”
value to get the mortgage, but a closer
look at the building and systems may reveal
that costly repairs are on the horizon.
Your inspection will point out any red flags
and areas of concern.
Many inspectors will supply you with a schedule
outlining the estimated cost to remedy or
repair the problems noted. In addition most
inspections will estimate the timing of
any suggested repairs and prioritize the
seriousness of any adverse findings. Armed
with this information the purchaser can
then make an informed decision on whether
or not to proceed with a purchase offer.
It is important to hire a qualified and
experienced home inspector. In Canada the
home inspection industry is, for the most
part, self regulated by a number of trade
organizations. Please check the real estate
services directory or contact one of these
organizations to refer you to a home inspector.
http://www.cahi.ca
Ontario Association of Home Inspector
http://www.oahi.com
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