What is a real estate appraisal?
A real estate appraisal is an objective and defensible estimate of a property’s value. It’s typically determined by reference to the current market and is estimated by a licensed and accredited real estate appraiser. A real estate appraisal may be required for:
- A property purchase or sale
- Extension of mortgage credit
- Expropriation by a public body
- Insurance coverage, claims or settlements
- Litigation including matrimonial and estate settlements
- Arbitration like lease negotiations and tax assessment appeals
Why would I need a real estate appraisal?
There are many reasons for an appraisal, including:
- Mortgage financing
- Corporate relocations
- Accounting matters
- Estate settlements
- Land development
You may also need an appraisal for:
- Divorce settlements
- Cases needing in-court expert witnesses
An appraiser should be used whenever a value of property is required to be professional, accurate and unbiased. Real estate appraisers may also provided consulting services that can help you evaluate an investment or a land development project.
What is “market value”?
Market value is the probable price that a property should sell for in an open and competitive market.
The Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) defines market value as:
The most probable price which a property should bring in a competitive and open market as of the specified date under all conditions requisite to a fair sale, the buyer and the seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.
How does an appraiser come up with a value?
The market value estimate is determined through one or more independent tests of value, which measure property’s cost, income productivity and saleability of a property. The three most frequently used methods are known as the:
- Direct comparison approach
- Income approach
- Cost approach
Direct comparison approach
Typically, a single-family residential property will be valued by direct comparison, whereby its value is estimated by comparison to the sales of similar properties that have sold recently in the local market. The cost approach often lends support to the valuation, particularly for properties with newer homes.
The income approach is frequently used for multi-tenant residential, commercial or industrial properties, with the valuation based primarily on the income-generating capability of the property. Usually, the income return on the property is estimated together with the potential return of the investment. Both the cost and direct comparison approaches may provide additional support to the valuation.
The cost approach to value is premised on the principle of substitution, which affirms that the value of a property that is replaceable tends to be set by the cost of acquiring an equally desirable substitute property. In essence, a prudent purchaser would not be expected to pay more for a property than the cost to reproduce it at some other like location.
Where does an appraiser get market information from?
We get our market information from various reliable third-party sources, including municipal offices, local real estate boards’ Multiple Listing Services (MLS), Alberta Land Titles, commercial data bases, property owners, realtors and our own files.
Who owns the appraisal report?
The appraisal report is owned by you, the client. The Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) defines the client as:
The party or parties who engage an appraiser in a specific assignment.
In other words, our client is the individual who orders (or requests) the appraisal, regardless of who is paying for the report. The Appraisal Standards require client confidentiality and unfortunately, only the client/party or parties who engaged the appraiser for the specific assignment are privy to the appraisal report.
However, the client can release a copy of the report to the property owner if their own company policy permits. This can happen when a bank orders an appraisal on behalf of the property owner. The bank is our client, and the property owner is referred to as the applicant. The appraisal is released only to our client (the bank), regardless of who pays for the appraisal.
Do you need special training to be an appraiser?
Yes. In fact, to become a candidate member of the Appraisal Institute of Canada (AIC), you must have a degree from a recognized post-secondary institution. AIC’s primary education partner is the Real Estate Division (RED) of the Sauder School of Business, University of British Columbia. The Canadian Residential Appraiser (CRA) designation requires eight courses through RED and the Accredited Appraiser Canadian Institute (AACI, P.App) designation requires sixteen courses. Both designations also require a minimum of two years’ working experience under the mentorship of a designated member, and completion of a number of workshops and seminars provided by the AIC.