How is Value Determined in a Home Appraisal?
An appraisal is a third party opinion of the market value of a specific property as of a specific date. The appraisal institute of canada defines market value as “The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and the seller each acting prudently knowledgeably, and for self-interest, and assuming that neither is under undue duress”
The appraiser’s job is to:
1. Accurately describe the subject property in as much detail as possible
An appraisal is only as good as the appraiser’s ability to accurately observe and communicate the unique details of the subject property. This would include an accurate description of the site and improvements.
For a detached single family home, the site description should include the general location, site size, shape and topography and any positive or negative site influences, such as views, traffic noise or any other influence that may impact the site.
The improvement description should include age of the home, style of the home, size of the home plus a description of the quality and condition of the home. This is also where the appraiser can discuss updates or renovations and or comment on a lack of maintenance and upkeep if necessary.
The zoning of the property, in addition to any future land use planning that may impact the subject in the form of an “official community plan” should also be considered and communicated to the reader of the appraisal report.
2. Explore ALL data points including recent sales and active listings
Now that the subject has been accurately described, it is now time for the appraiser to look at all the sales and listings happening in the area. The appraiser’s job is to choose the best sales. The best sales are those that are most similar to the subject in terms of location, house age, style and size. The comparable sales should be similar to the subject in as many aspects as possible.
Other data points include active listings. It is important that appraisers not only speak to the “demand” side of the equation but also to the “supply” side. It takes both demand (Sales) and supply (Listings) to make up a market.
3. Make market derived adjustments relative to the subject
Once the sales have been chosen the appraiser must make adjustments for any and all differences. For example, if one of the comparables is a larger home, it must be downward adjusted to make it comparable with the subject. Alternatively, if one of the comparables is an older home in relation to the subject, an upward adjustment is necessary. It is also important to adjust for time if any of the sales are dated and the market is trending upwards or downwards.
4. Develop a reasonable range of value for the subject property
After all of the adjustments are completed the appraiser should have an adjusted range of value. This range should be no greater than 15%. For example, an adjusted range of value of $1,000,000 to $1,100,000 would be considered reasonable.
5. Without bias or prejudice, determine the most probable selling price of the subject property
This final step is where the appraiser reconciles the value, taking into consideration all available data, the type of adjustments made and decides on what the most probable sale price would be for the subject property. Things the appraiser will consider include:
- What comparable sale is most recent?
- What comparable sale has the least adjustments?
- What comparable sale is located closest to the subject property
- What comparable sale is most similar in age, style and condition to the subject?
The appraiser does their best to convey buyer behaviors in the marketplace. The problem is, buyer’s do not all act in perfect unison, and many purchase decisions are made in duress, with excess motivation, and with a high level of subjectivity. It is important that the appraiser you hire, or that the bank hires, is experienced and competent not only in the area they are appraising but in the property type as well.
Appraisals in Vancouver
There are many concerns when buying a home. Adlaw Appraisals will ensure that you have one less thing to worry about. We promise to deliver the accurate findings you need to make an informed decision when house hunting. Give us a call today.