Real estate appraisals play an important role in any real estate market but when prices are rising like they are currently, they become even more crucial. But how exactly does an appraiser determine value in such a crazy market and what factors do they examine? MBN caught up with Dan Brewer, President of the Appraisal Institute of Canada (AIC) and licensed mortgage and real estate broker, to find out more about how appraisers structure their valuation process and why an independent and unbiased opinion is simply essential.
“One of the key methods in valuing a residential property involves comparing properties that have recently sold within the neighbouring area that offer similar characteristics to the property being valued,” Brewer explains. “Since the objective of the appraisal is to estimate the price the subject property would most likely sell for if exposed to the marketplace, recent sales of similar properties are used for comparison and as benchmarks. Comparable sales represent what other informed buyers in the marketplace are willing to pay for similar features, location and amenities.”
Where recent sales in the immediate area may be lacking, the appraiser can analyze past sales and expand the search to surrounding neighbourhoods offering similar characteristics to the subject area. “Appraisers obtain their market information from various sources, including Multiple Listing Services (MLS) listings, land title registries, private data service providers, private sales (sales by owners), assessment information and various other sources,” Brewer says. “As per the Appraisal Institute of Canada’s professional standards, commonly known as the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP), an appraiser must conduct a three-year sales history and a one-year listing history search and analysis of the property.”
By adopting a methodical, process based approach that encompasses due diligence, research and analysis of key market and property data, appraisers enable brokers to better understand the property’s sales and listing history and the estimated time to sell the property (exposure time). “The appraisal gives the broker information on purchaser behavior and supply and demand for similar properties, Brewer says. “It will also detail structural characteristics and condition, assessment data, title restrictions, zoning and land use controls, to name a few.”