FREQUENTLY ASKED QUESTIONS
Buying property is the single largest investment most Canadians make in their lives. Whether you are looking for a family home, or purchasing property as an investment, knowing the value of real estate is absolutely critical. Flynn Mirtle Moran’s business is advising clients, ranging from homeowners to multi-national corporations and governments on real estate matters.
The following represents some of the more common questions that we are frequently asked:
WHAT IS AN APPRAISAL?
An appraisal is a valuation report prepared by an expert who determines the estimated market value for any given home or property. It is the impartial estimate of that property's value. To ensure the market value estimate is objective and accurate, the appraiser must inspect the property and research the market extensively. Relevant data and analysis must support the appraiser's conclusion.
WHAT TYPES OF APPRAISAL REPORTS ARE SUITABLE FOR RESIDENTIAL PROPERTY?
Residential appraisals are completed on computer based form reports with tick boxes and narrative sections to describe the property and buildings and include photographs and mapping. Forms must meet a minimum standard established by the Appraisal Institute of Canada and they are most often presented in one of the following two formats:
Summary Appraisal Reports – This is the most common form report and requires an inspection of the property including the interior of all buildings. It is used for a variety of purposes and would be the format most likely used for your mortgage financing.
Limited Appraisal – This is a restricted appraisal that does not reflect the depth of analysis required in a Summary Appraisal and is generally utilized by institutions for low ratio financing or situations where access to the property is not possible, such as foreclosures. There is no onsite inspection completed and some publicly available descriptive data on the property such as the Multiple Listing Service is relied upon.
Comment – in certain circumstances, for example expropriation or litigation, a more complex report may be appropriate, similar to those for commercial property (see following question)
WHAT TYPES OF APPRAISAL REPORTS ARE SUITABLE FOR COMMERCIAL PROPERTY?
Due to the complexities associated with commercial properties, appraisal reports are in a narrative format. The main types of report are as follows:
Full Narrative – This is the most thorough type of report and is the common format used for most types of commercial property. Report length and complexity will be dependant upon the purpose of the report. Reports for litigation typically are the most detailed, while a report on a "straightforward" property for financing will typically be briefer. The report will discuss the different aspects of the property in a narrative format and includes a wide depth and breadth of analysis.
Short Narrative – This type of report is similar to the full narrative in many aspects; however, comments will normally be in a summary format and conclusions are presented with a lower degree of analysis.
WHAT IS AN APPRAISER?
Real estate purchases can be pretty intimidating. The city levies taxes on home and property, banks offer mortgages, real estate agents earn commissions, vendors want the highest price, and buyers want the best value. Combining these interested parties with changing property values, market trends and new laws, real estate investments can be confusing and stressful.
Knowing the value of real estate is essential when property is being bought or sold, or when property is involved in a legal dispute. Appraisers determine property value for mortgage or lending purposes, assisting with investment decisions, verifying damage claims (such as after a fire or a flood), determining compensation if a property is being expropriated, and for assessing capital gains and other taxes. An appraisal may also be required to determine the prospective value of a property under construction.
WHO USES OUR SERVICES?
Companies, institutions and individuals hire appraisers to act as consultants and valuation specialists. Typical appraisal work comprises the point in time conclusion of current, retrospective or prospective real property value. Appraisers may also act as consultants for feasibility studies, property management, lease analysis, market rental analysis, and Highest and Best Use studies.
WHAT IS THE HIGHEST AND BEST USE?
Highest and Best Use is the foundation of a real estate appraisal. The appraiser will consider many different aspects of the property to arrive at the most profitable, or "Highest and Best Use" of the real estate in question. This will involve a thorough analysis of legal restrictions affecting land use, physical factors, location, design and market demand for the real estate. The conclusion forms the basis for the subsequent valuation analysis.
WHAT ARE THE DIFFERENT APPROACHES TO VALUE?
Appraisal practice relies on an established body of knowledge, as well as on accepted technical approaches to estimating property value. An appraiser can use three basic methods of valuation to determine a property's market value.
The Cost Approach estimates how much money it would take, at current material and labour costs, to replace your home or commercial property with an identical one. Accumulated depreciation is subtracted from that figure, and the estimated vacant land value is added.
The Direct Comparison Approach is also known as the Sales Comparison Approach, and is based on the selling prices of comparable properties. This method compares your property to others that have recently sold. When using this method, the appraiser must also analyze agreements of sale, listings, offers to purchase and other market factors to conclude a fair market value.
The Income Approach refers to how much income your property would produce if it were developed to its Highest and Best Use. The appraiser must consider the return on the property if it were leased as an apartment, retail store, or a warehouse for example. Operating expenses, taxes, insurance and maintenance costs must be analyzed. This approach is typically utilized for investment, commercial and industrial properties.
To arrive at a final estimate of value, appraisers will use one or all of these approaches. In specialized circumstances, for example when dealing with development land, other approaches may also be employed.
WHAT ARE THE COMMERCIAL BENEFITS OF HIRING AN APPRAISER?
Institutions and commercial organizations have a lot to gain from the services of professional appraisers. Because appraisers are experts in valuation, their knowledge and experience has long been trusted by mortgage lenders, brokers, development companies, realtors and lawyers to provide a variety of services. Appraisals are used to estimate current equity, market value for purchase or sale, to obtain financing, for commercial mediation/arbitration, settlements, and to assist with investment and business decisions.
In addition to these traditional appraisal activities, valuation professionals are able to offer a wide range of skills and advice regarding a project. Thus, appraisers are value-added professionals.
With a broad spectrum of knowledge about valuation techniques, regulatory issues, investment analysis, development approval process, surveying and construction, and social issues such as demographics, appraisers are in a unique position to work as consultants.
WHAT PROFESSIONAL DESIGNATIONS SHOULD I LOOK FOR?
All of the appraisers with Flynn Mirtle Moran either hold, or are working towards professional designations of the Appraisal Institute of Canada (AIC). The AIC, founded in 1938, is dedicated to serving the public interest through continually advancing high standards for the appraisal profession and is the pre-eminent real estate institute in Canada.
The AIC grants the following designations:
AACI, Accredited Appraiser Canadian Institute or P.App, Professional Appraiser - Appraisers with these designations are qualified to work on all types of real estate.
CRA, Canadian Residential Appraiser – Appraisers with this designation are qualified to work on residential property (up to four units).
CRP, Certified Reserve Planner - This designation signifies a professional with the expertise to complete reserve fund studies or depreciation reports for condominiums, institutions, corporations and government entities in Canada.
These designations ensure that appraisers provide a completely objective opinion of value, independent of any other business interests. These designations are earned after a rigorous program of educational courses, and supervised appraisal experience in the market and are retained through a program of continuing professional development.