It’s fitting that Trevor Ellis, an RCMP Peace Officer (The Royal Canadian Mounted Police), wanted to do what was right when it came to selling his home privately. That’s why the 37-year-old decided to get his home appraised.
“We wanted to find out the market value because we had some potential buyers lined up and we wanted a fair price,” says Ellis.
Although a bank appraisal had been done on the house located in Regina, Saskatchewan, a few years ago, this was the first appraisal Ellis had ever commissioned. In fact, few homebuyers and sellers commission their own appraisal. However, some experts say it could be a beneficial step to take.
Home appraisals simplified
Real estate appraisals take many different forms. An appraisal is a type of inspection that results in an estimate of a home’s value. Mortgage lenders require a real estate appraisal as part of their underwriting in order to verify the value of collateral for a loan. In addition, depending on the equity in a property, an owner may require re-insurance through CMHC or Genworth, which is governed by regulations issued by the Department of Finance.
Home appraisals for lending purposes are done on a case-by-case basis, as a confirmation of market value is required for a lender as part of their risk assessment. Although most home appraisals are lender-issued, some first-time homebuyers are now requesting their own.
“Homeowners order their own home appraisal for a variety of reasons, such as planning their financial assets, retirement planning, intention to sell their home privately or settlement of a divorce/separation,” says Tom Fox, AACI, P. App in Regina, Saskatchewan. “The benefits of the purchaser ordering or requesting a house appraisal for their own purpose is that now they become the actual client, which means the home appraiser is now responsible to them. An independent home appraisal can assist a homeowner in establishing what is a reasonable sale price, if they are paying too much in property taxes, if it is better to rent out a property rather than sell it or which improvements might add the highest value to a home in that particular market.”
The prepared real estate appraisal indicates such factors as economic life, detailed condition of the property, any further recommended inspections (engineer’s report, etc.) and further detail on the utility of the property. Costs can vary, but a residential home appraisal starts at $250. Places where comparable data is less available or restricted will cause the cost of an appraisal to increase.
“The appraiser will suggest an appropriate house appraisal fee based on the complexity of the assignment, the appraiser’s expertise, knowledge and reputation,” says Fox. “The appraisal cost is relatively small in relation to the overall cost of your investment.”
Still, some industry professionals don’t agree that it’s money well spent.
“The benefits are few if any,” says Robert Frasson, owner of Toronto-based real estate brokerage Keller Williams. “There may be value in private sale homes involving a unique property, a marital break-up or division of assets, but in a typical real estate transaction, the only one to have any benefit would be the lending institution.”
When it comes to lender-issued appraisals, homeowners should know that typically the lender does not share the appraised value with the buyer.
“It may also depend on the amount of equity the buyer has, as to the type of house appraisal that is done,” says Frasson. “If the down payment is high and the credit score is good, the appraiser may do what we call a ‘drive-by appraisal’ wherein the appraiser does not enter the house and only looks at it from the outside . . . In our experience, we have found that 80 per cent of the appraisers perform drive-by appraisals and don't actually enter the property.”
If the lender-issued home appraisal comes back as being less than what the buyer agreed to pay for the property, the buyer doesn’t have any recourse.
“Basically, they have no right,” says Frasson. “Most of the time, the buyers will not be privy to the appraisal, they only receive a satisfactory or unsatisfactory appraisal. The lending institution will then offer to lend based on the appraised value. This would mean that the buyer would have to come up with a higher down payment, often securing funds from a secondary lender or from friends and family.”
Frasson says the reason why a lot of homebuyers and sellers don’t get their own personal home appraisal done is because a real estate appraiser uses the same information and principals that a Realtor uses to come up with market value.
“A competent Realtor will provide comparables and or a CMA [comparable market analysis] that would provide the buyer/seller with an acceptable fair market range,” says Frasson. “However, Realtors are more knowledgeable of the actual properties than the appraiser. A Realtor works in an area day in and day out and is in touch with the nuance that make a neighbourhood desirable or undesirable and the appraiser just looks at the numbers and relates no emotional component to the value of the home.”
Still, if a homebuyer decides to go the appraisal route, the house appraisal would take place during the condition period of the home-buying process.
“Unless, however, the potential purchaser would like to confirm the value of the property in advance of making an offer to purchase or for house values in a particular neighbourhood, then it is recommended that early in their house search they consult an independent appraiser,” says Fox. “The purchaser may include a ‘subject to an appraisal’ clause in their offer to purchase.”
If the buyer gets his or her appraisal back and the appraised value is less than the list price, Frasson says it can help buyers negotiate the price. For Ellis, his home appraisal gave him insight on how much his house was really worth when coming up with a list price.
“We want to sell our house but we also want to get what it is worth,” says Ellis. “We had a true comparison to other properties in our area and knew what was a fair price. It also allowed us to see where we may want to make improvements before listing it.”
Ellis says he plans on getting another home appraisal done on the house he’s building and advises other first-time homeowners to do the same.
“I think buying your first home can be a good experience but you don’t want to overpay for something,” he says. “If you know the appraised value, you know what kind of deal you are getting. You also know that there should be no problems with financing.”
How appraisers come up with the value of a home
When it comes to the formula house appraisers use to distinguish the value of a home, there are three recognized approaches to value. Here is how appraisers add it all up.
Direct Comparison Approach: This approach compares the subject to similar properties that have sold, are for sale, and that have expired and estimates a house 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, a 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).
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