InFocus: The Role of Appraisals

How do the three main types of building appraisal work?

How do the three main types of building appraisal work?

Fill in your email details for an immediate FREE download

Whether it’s a retail strip plaza, a mall, an agricultural compound, a single family home, or an industrial building of 5,000 or one million square-feet, getting an appraisal is an important first step in any property acquisition process. In order to learn how to weight the importance of different factors when forming their opinion on value, registered appraisers go through a stringent examination process.

When determining the value of a property or building, there are several methodologies that qualified appraisers have to choose from, which are driven by the scope of the assignment and the property type.  The first is the ‘Direct Comparison Approach’; a methodology whereby the appraiser develops an opinion of value by analyzing completed sales, listings or pending sales of properties that are similar to the subject property. “Estimates of market rent, expenses, land value, cost, depreciation and other value parameters may be derived using a comparative technique,” explains Dan Brewer, President of the Appraisal Institute of Canada (AIC) and licensed mortgage and real estate broker.

Another methodology commonly adopted by appraisers is the ‘Cost Approach’, which considers the land and building components separately, and reaches a value conclusion by adding these estimates together to form an opinion. “Like the Direct Comparison Approach, the Cost Approach is based on a comparison of the cost to replace the subject (cost new) or the cost to reproduce the subject (substitute property),” Brewer says. “The total cost estimate is adjusted by deducting the accrued depreciation (i.e., physical wear and tear, functional deficiencies and external influences) of the dwelling and the site improvements (e.g., garage, deck, pool, etc.). The Cost Approach is most reliable when a property is newer due to the lower depreciation, although it’s generally not a weighted approach."

The third methodology is the ‘Income Approach’, which is used to determine the valuations of income-producing properties. “Typically purchased as investments, the earning potential is an important element affecting the value of these properties,” says Brewer. “Through the Income Approach, the appraiser analyzes a property’s annual income and expenses to convert the net income into a present value. This methodology is typically not applied when valuing a residential property.”
 

Fill in your email details for an immediate FREE download

The Appraisal Institute of Canada (AIC) is a leading real property valuation association with over 5,200 members across Canada. Established in 1938, the AIC works collaboratively with its 10 provincial affiliated associations to grant the distinguished Accredited Appraiser Canadian Institute (AACI™) and Canadian Residential Appraiser (CRA™) designations.

AIC Designated Members are highly qualified, respected professionals who undertake comprehensive curriculum, experience and examination requirements. Our members provide unbiased appraisal, appraisal review, consulting and reserve fund studies on all properties within their scope.