Real estate property appraisals for mortgage financing
A mortgage lender is interested in knowing what the market will pay for a property under normal circumstances. A real estate appraiser will produce a document called an appraisal that calculates the market value of a property being used as security for a mortgage. Market value can be defined as:
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 acted knowledgeably, prudently, and without pressure.
There are three basic types of appraisal reports, ranging in scope from basic to highly detailed.
The desktop appraisal is typically used when an AVM is unavailable and the property is located in a marketable area. This report relies on MLS reports, including data on recent sales and data on recent listings. It does not provide detailed information on the property nor is there a physical inspection of the property, which raises the same issues as are applicable to AVMs.
Drive-by appraisal for mortgage financing
This type of appraisal is based on the same information as the desktop appraisal; however it also includes an inspection of the exterior of the property. While AVMs and desktop appraisals cannot provide details on whether the property is actually in a physical condition normal for the neighbourhood, a drive-by appraisal can at least indicate that the property’s exterior is typical or conforms to the neighbourhood. In addition the drive-by appraisal allows the appraiser to view and provide details on the neighbourhood, which is a key element in assessing the marketability of the subject property. The report typically contains exterior photographs of the property as well as the immediate neighbourhood.
If the drive-by appraisal results in the determination that the property appears to be in a condition that is not typical of the neighbourhood, a full appraisal should be completed.
Mortgage brokering in Ontario is regulated by the Financial Services Regulatory Authority of Ontario (FSRA – formerly FSCO) and requires a license. To obtain a license you must first pass an accredited course. The Real Estate and Mortgage Institute of Canada Inc. (REMIC) is accredited by FSRA (formerly FSCO) to provide the course. For more information please visit us at www.remic.ca/getlicensed or call us at 877-447-3642.
Full Appraisal for mortgage financing
A full appraisal expands on the information and techniques used in the desktop appraisal and the drive-by appraisal by having a full inspection of the subject property completed. This inspection allows the appraiser to document the characteristics of the subject property, including any upgrades or defects in the home. The report typically contains interior and exterior photographs of the property as well as the immediate neighbourhood. 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. Virtually every sub-prime and private lender will insist on a full appraisal.