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Ever hear the comment that the “appraiser killed the deal”? Then you better read this!
Real estate appraisers work with their clients to determine an opinion of market value of a property to finance or refinance their clients’ mortgage. This value is a critical piece of information and there is a lot at stake in its accuracy — for the REALTOR®, the lender and the home owner!
Obtaining a reliable appraisal that is unbiased, independent and based on comprehensive research and analysis is key to the success of this transaction.
There is an overall misunderstanding about how an appraiser arrives at a market value, sometimes leading to a misconception that “the appraiser killed the deal”. This article will debunk these myths and provide additional insight and perspective from a designated appraiser’s point of view.
Myth #1: The purchase price of the property is the same as the appraised market value.
Reality: The appraised market value may not be the same as the selling price of the home- it may be higher, it may be lower. Individual real estate markets can be volatile and are impacted by the economic conditions of the market. For example, in a “sellers’ market”, or when there are multiple offers on a home, an inflated selling price above the appraised market value can result.
“Bidding wars” may skew the true market value of the home, when similar substitute properties are not available in the market. A multiple-offer scenario may be good for the seller, the real estate agent and the mortgage broker in the short term, but in the long-term, the purchaser may face challenges when selling the property in less active market conditions.
Having an opinion of value that is obtained through comprehensive research of the market over time provides the property owner and lender with a realistic value. An appraised value helps to ensure that all concerned – sellers, buyers and lenders – make informed decisions. Consumers and lenders should be wary of selling prices that are inflated – either through multiple offers or other local market factors.
Myth #2: Appraisers only consider past market/sales data when determining the value of a property.
Reality: To provide a reliable market value, AIC-designated appraisers consider a number of factors as such as:
- Sales of the subject property within the last three years;
- Past sales of comparable properties to the subject property;
- Comparable properties that are currently for sale; and
- Current market conditions.
Adjustments are made based on the analysis of the comparable properties which rely on market-derived elements of comparison including property size and other factors.
One of the key requirements under Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) is for the appraiser to conduct a three-year sales history and a one-year listing history search and analysis of the subject property. This data considers private sales (non MLS) transactions as well as those on MLS. Other data sources, such as title and property registries, are also reviewed to ensure the most comprehensive and reliable market value is obtained.
For more detailed information about the various methodologies used in real estate appraisals, please view AIC’s Industry Guide to Understanding the Fundamentals of Real Estate Appraisal.
Myth #3: The appraiser is influenced by the client’s need for a specific value.
Reality: An AIC-designated appraiser has a professional and ethical responsibility to provide an independent and unbiased opinion of the value of a property. Their work will produce an estimate of market value being the most probable price level – irrespective of the selling price or a desire to “meet” a certain value.
All AIC members must comply with AIC’s CUSPAP, a Code of Conduct and Regulations. As professionals, AIC members are obligated to prepare their work in compliance with these standards.
Myth #4: When a homeowner is completing renovations they can expect that the value of their home will rise proportionately to the investment.
Reality: The return on investment depends on the added value of the renovations, the quality of the renovations, and the neighbourhood’s market conditions. Unique designs or improvements that are uncommon for a particular market may even adversely impact the selling price of a home; therefore, the full return on the investment will likely not be obtained.
Obtaining an expert opinion of value from an appraiser will provide an objective perspective on the marketability of the property.