An Appraisal is a document that gives an estimate of a property’s fair market value, provided by an appraiser. Appraisers are trained to use existing, market data to do  the home valuation. Consideration is given to the property, its location, amenities, and the current market values of similar properties which sold recently.  Realtors usually provide a "CMA" which is a Current Market Assessment, however the lenders will still require an official appraisal in most cases.

Why get a Home Appraisal?

An appraisal is an important and necessary step in the home purchase/refinance process. Most lenders will not lend on a property without an appraisal, and if they do then  it will be on the purchase amount or appraised value, whichever is *lower*.

When might you need an appraisal? When you need to:

• determine a value when selling a home
• challenge a property tax assessment
  
• finalize and settle a divorce or separation
  
• settle an estate
• identify the replacement cost  eg. for insurance purposes
• refinance an existing mortgage
• obtain a secured line of credit against your home
• obtain financing as part of  your offer to purchase
  

Hint! When you get ‘pre-approved’, remember, the property is unknown, so the lender also has to assess the property when making a lending decision, and this is done via an appraisal.

Hint! Lenders may have a list of approved appraisers that must be used, so don’t rush out and order an appraisal until you know if they are on the lender’s list. Payment for the appraisal may be added to your closing costs instead of due up-front, but check with your mortgage consultant to find out how it will be managed. 

What are Real Estate Appraisal Methods?

Appraisers use three common approaches when establishing the value of a given property:

1. Sales Comparison Approach:  As the title implies, the appraiser identifies several comparable properties in the neighborhood which have recently been sold and compares them to the one you are buying.  The appraiser  compares the sold properties to the subject property and makes a dollar adjustment up or down on the comparable properties' sale prices . Factors used in the comparison may include:  square footage, number of bedrooms and bathrooms, lot size, view, and the condition of the property.
   


2. Cost Approach: In a nutshell, the method used to  arrive at the property value is the market value value of the vacant land land  plus the cost to reconstruct the appraised building as new, minus accrued depreciation the building has in comparison with a new building. This is typically used with income or commercial properties and potentially for construction mortgages.
   
   
3. Income Approach: In this approach the potential net income of the property is capitalized to arrive at a property value. Capitalization means converting a future income stream into a present value. This is typically used with income or commercial properties.

Hint! If you are making an offer conditional upon obtaining financing, please allow enough time for an appraisal to be done. The appraisal is usually done after the lender has reviewed all your documentation and you have fulfilled as many of the requirements needed by the lender to approve your mortgage. In some cases, the lender may have access to a quick electronic appraisal, which speeds up the process. But otherwise, it will take a few days to order, executive, deliver and review the appraisal before the lender will tell you if you can have the money.

Hint! If you are re-financing your home, an appraisal may be necessary, but if you are just switching your mortgage balance, it may be less needed. Each case with each lender is unique, so be prepared and you won’t be surprised.

Hint! If you are buying an investment property, the lender will want to know the current rents if it is already occupied by a tenant, otherwise they will likely have an appraiser determine the market rents. Help the process go smoothly and have copies of any existing leases and tenancy agreements ready.