Chapter 15: Application Analysis - The Property

1.      List the different purposes for which an appraisal might be required.

·         The cost to rebuild the home in case of damage, such as by fire (insurable value)

·         A value so that a municipality can apply its property tax rate (taxation purposes)

·         The price that a real estate investor would pay for a property based on his or her preferred rate of return (investment value)

·         The amount that the property can obtain if sold (selling price)

·         The future value of a property under construction (future price)

·         The value of a property being expropriated by the Crown (expropriation value)

·         The market value of a property for a Lender to decide on an appropriate loan amount for mortgage financing.

2.      What is the role of the appraiser in the appraisal process?

The appraiser is the accredited individual who completes the appraisal report.   

3.      What organizations award designations to appraisers?

The Appraisal Institute of Canada (AIC), Canadian National Association of Real Estate Appraisers (CNAREA), Ontario Real Estate Association and the Real Estate Institute of Canada.

4.      What are the different designations that an appraiser may have?

The AACI, P.App, CRA, DAR, DAC, CMAR, CAR, MVA or FRI.

5.      How does market value differ from the price for which a property may be sold?

Price is what may be paid for a property while market value is The amount, in Canadian funds, for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing, where the buyer and seller have each each acted knowledgably, prudently, and without pressure.

6.      Discuss the three approaches to calculating the market value of a property and describe the most relevant approach for mortgage financing.

There are three approaches that appraisers use to calculate the value of a property:

·         Income Approach:  this approach is typically used for commercial income producing properties, using the property’s income to determine the market value            

·         Cost Approach: this approach uses the cost of rebuilding the property less depreciation plus the value of the property.  This is most widely used to confirm the value determined by the direct comparison approach as well as being used to determine the replacement value of a building for insurance purposes

·         Direct Comparison Approach:  This approach uses the theory of substitution, comparing similar properties that have recently sold to the property being appraised.  The Direct Comparison Approach is the most appropriate for mortgage financing and is therefore relied heavily upon in the appraisal report

7.      Explain how adjustments are made in the direct comparison approach.

·         If the comparable characteristic is superior to the subject, subtract from the comparable property’s value

·         If the comparable characteristic is inferior to the subject, add to the comparable property’s value

8.      Discuss the pros and cons of AVMs.

AVMs can provide quick, basic property values, however they are prone to producing values that may or may not actually be representative of the subject property since an AVM cannot make adjustments for the physical condition of the property.

9.      What is the most detailed type of appraisal report and how does it differ from the other two types of appraisal reports?

Considered to offer the most information and therefore the highest level of protection for the Lender, the Full Appraisal is the appraisal of choice for Lenders who rely heavily on the property as security and less on the personal covenant of the Borrower.