The Appraisal Process

An appraisal is an opinion of property value based on research conducted by a professional appraiser. The report presents the fair market value of a house based on comparable sales, condition and location of the property, size and number of rooms and type of construction.

Appraisals are generally done in connection with mortgage financing and the price used is a base to determine how much money to lend. Banks and mortgage lenders don't want to loan out more than a property is worth. If the appraisal comes in at less than the sale price of the home, concessions will be necessary. The seller may have to lower the price, the buyer may have to offer a larger down payment or a compromise may have to be reached.

The appraisal process can seem confusing to the average homeowner, but it needn't be. Appraisers in Canada follow a set of generally accepted appraisal guidelines and practices, known as CUSPAP, Canadian Uniform Standards of Professional Appraisal Practice, which govern the ethical and legal aspects of the appraisal reporting process.

For the homeowner, however, generally the most important aspect of the appraisal is learning the estimated value of their home and understanding how that conclusion was reached.

The Inspection

The inspection of the home is usually the most important part of the appraisal process; however it takes the shortest amount of time in most cases from 5-15 minutes for an apartment, to 15 to 40 minutes for a home, depending on the size, the features, the floor plan, and the condition of the home.

The Direct Comparison Approach

Once the inspection is completed, the appraiser will compare your home to recent sales, generally 3 - 6 months, and 'active' listings currently on the market, in your neighborhood. These sales are called comparables.  Ideally, the appraiser would like to find a home exactly like yours right next door to yours. However, this rarely happens. The appraiser will compare your home to homes that are as similar as possible. Similarities include but are not limited to: date sold or listed, sale price/list price, square footage, bedroom/bathroom count, age, appeal, parking, basement suite/finishing, condition, quality of materials used in construction and amenities. Where differences occur, the appraiser makes adjustments. These adjustments are based on the appraisers experience with and knowledge of the market and what value the typical buyer would place on a given amenity. After the adjustments are made, the comparables will indicate a value range. This value range is then narrowed to the Final Estimate of Value based on market trends (are sales prices in the area stable, rising or falling?) and whether your home compares more closely to homes at the upper, lower or middle of the range.

The Cost Approach

The appraiser has also estimated the Cost to Construct your home on your lot using the same materials as are present in your home. 

 This Cost to Construct is based on residential cost handbooks and the appraiser's knowledge of local building codes and labor rates. The cost to construct a replacement home is based on providing a similar home with the current building standards, with an unfinished basement.  Then the cost of completing the basement is added, usually because basements were not developed at the same time as the rest of the house and are usually of lesser quality.  This amount is depreciated by the appraiser for the physical life of the property. For example if you home is built on the west coast, it can have a 60 year life, and if the home has 30 years life remaining, it will be depreciated by 50%.

This is added to the estimated value of the lot if it was vacant, plus other minor additions, such as landscaping, and the value of the detached garage, if there is one. The Cost to Construct ideally should fall within the value range indicated by neighborhood sales, however as the home gets older, this method is generally considered less reliable.

The Client & The Final Report

The appraiser follows guidelines and uses knowledge based on continuing classroom education and experience in the field to arrive at a logical conclusion regarding the value of your home. We hope this brief overview has answered your questions about the appraisal process and the way in which the Final Estimate of Value is determined. However, if you have any unanswered questions, you may direct them to your loan officer, or if you hired the appraiser, you may contact the appraiser.

After the appraisal is completed, it is submitted to the Client. The client can be a person or institution. By law, the appraiser can discuss the particulars and outcome of the appraisal with the client only. If the appraisal was ordered by your bank/mortgage company then they are the client and "own" the appraisal. (Your loan officer can inform you as to any specific requirements your bank/mortgage company may have about receiving a copy). Any questions you have regarding the appraisal itself may be directed to your loan officer who will, in turn, contact the appraiser if further clarification is required.