Category Archives: appraisals

Understanding Real Estate Appraisals

Real estate appraisals are an integral part of the purchase and sale of property, particularly if the buyer is seeking funding from a lender. The appraisal value of a home can make or break a sale, so it only makes sense that so much weight is put upon it.

Whether you are buying or selling, you have minimal control over the appraisal – but that doesn’t mean you need to be in the dark about what it involves and how it is determined.

There are numerous myths about real estate appraisals that people usually discover the hard way. As a buyer or seller, it is essential to have at least a general understanding of how appraisals work.

Below I am going to summarize what you should know about real estate appraisals. Use this as your guide to understand the appraisal process.

1. Is there a difference between an appraisal and a home inspection?

Definitely. The vast majority of real estate transactions involve both an appraisal and an inspection, but they are very different things. An appraisal focuses on determining the market value of the home. The value is based on a lot of various factors, including the cost of similar homes in the area.

A home inspection is supposed to identify problems with the home. While an appraisal may look for obvious flaws, a home inspection goes much, much deeper. With certain kinds of loans, however, they can become intertwined.

For example, with an FHA loan, there are certain condition requirements a home has to meet to be approved for an FHA mortgage. It behooves sellers to understand how to make their home FHA mortgage compliant. Why? A significant percentage of home buyers will use FHA financing to purchase a home.

When a borrower is using FHA financing the appraiser will look the home over to make sure it meets the FHA’s minimum standards for the condition.

2. So what does the appraisal process involve?

Like a home inspector, an appraiser will go throughout the home to inspect its state of repair, its features, its square footage, etc. Mostly, the appraiser looks for all the factors that determine the general market value of a property. People often ask what does an appraiser do. You can find out in this comprehensive resource.

The appraiser will go through every room, taking note of all the details, big and small, that are required to accurately compare the home to other homes to measure its value. When all the details of the house are collected, the appraiser can look over the recent sales of similar homes – searching for properties as identical to yours as possible – and make a comparison to deliver the final appraisal price.

3. Are there different types of appraisals?

The most common kind of appraisal is when an appraiser visits a property and inspects both the inside and outside of the property. An exterior-only inspection is also possible which is known in the industry as a “drive-by appraisal.” A drive-by appraisal is certainly not as comprehensive and is often used when the lender doesn’t have much doubt as to the value of a home supporting the mortgage amount being requested.

The appraisal is an essential part of most real estate transactions!CLICK TO TWEET

4. What will you see in a real estate appraisal?

  • An appraisal report will have specific details about the subject property. There will be a side-by-side comparisons of similar properties that have sold and are for sale.
  • The appraiser will provide an evaluation of how the real estate market is performing in the area.
  • The appraiser may provide concerns in the report about issues he or she feels are harmful to the property’s value.
  • There will be flagged descriptions of any significant problems such as cracks in a foundation or water penetration through the roof.
  • The appraisal will include an estimate of the average sales time for other similar homes.
  • The appraisal will provide whether values are on the rise, decreasing or stable.
  • A description of the area in which the home is located such as a neighborhood, country road or busy street.

5. Are appraisals necessary?

Appraisals are always a good idea for property transactions, and they are required for any home sale that needs a mortgage. Appraisers use their experience and training to give an accurate view of the value of a home.

Since buyers want to spend only what is necessary, and sellers want to generate as much income from a sale as possible, it just makes sense to decide the value of the home before money changes hands.

Lenders also demand appraisals before giving out loans to protect themselves. If for some reason the buyer defaults on the loan, the lender wants to know that they can sell the property and get back their money. Lenders never want to see a low appraisal on a home purchase for which they are lending money.

6. Who is the appraiser and how are they hired?

  • The lender giving the mortgage hires the appraiser through a third party company. Appraisers and lenders are no longer allow to be in direct communication.
  • Appraisers become licensed after completing licensing coursework and internship hours.
  • The appraiser has to be an objective third party who has no financial or other connection to any person involved in the transaction.
  • The property being appraised is called the subject property.

7. Is the appraisal information available to anyone?

No. The appraisal is owned by the party that orders it – which is not necessarily the party who pays for the appraisal. It’s possible, although rare, the owner of the home will pay for the appraisal to move the sale forward, and find themselves frustrated that they can’t get access to the appraisal information.

If the lender orders the appraisal, no matter who pays for it, then the lender is the party in control of who has access to that information. In such a situation it is up to the lender to inform the buyer or the seller what the home appraised for.

More often than not, however, the buyer is paying for the appraisal as part of the process for getting a mortgage. The mortgage holder is required to give the buyer a copy of the appraisal report by law.

8. Is the appraisal the final word on the value of the home?

If you do not like the value determined by the appraiser, you do have recourse. Your real estate can talk with the appraiser and ask questions about why decisions were made that you disagree with. It is possible the appraiser missed something.

Everyone makes mistakes, even experienced professionals. It is also possible that your perspective on the value or your home differs from the appraiser.

While you may think that certain aspects of your home are of a certain value, the appraiser may not see it that way. If you are unhappy with the appraisal, you can request another one. Now and then a low appraisal will be fought. Just be sure you have good cause because the most likely outcome is that the new appraiser will produce a similar opinion as the last one.

In such circumstances be prepared to present a valid argument as to why you believe the appraisal is wrong. If you hired an exceptional real estate agent, they should be ready to help you with this.

9. Why is your neighbor’s house valued higher than yours?

Many times homeowners are frustrated to discover that their homes are not as valuable as similar homes in their area. They may feel that their homes are more beautiful than the neighbors, they may have made additions that they felt should have added more value, etc.

If you find yourself in such a situation, try to be patient and consider the possible reasons why the homes were appraised differently.

Your neighbor may have more square footage than you realize, bigger bathrooms, nicer finishes or any number of things that can make a home more valuable. It’s possible the neighbors made improvements that added value to their home while yours did not.

If you think the appraiser made a mistake, you can always ask him or her why the discrepancy exists.

10. How often do you need to get an appraisal?

In most situations, an appraisal is considered valid for six months. However, in specific markets, where home prices are changing rapidly, some lenders may only use an appraisal for three months or so. And remember, the appraiser will only consider finished improvements to the home. You cannot ask them to determine value based on good faith.

Essentially, the value the appraiser comes up with is valid for the day they completed their report. Real Estate values are continually changing. Sometimes an appraisal will need to be re-certified if it becomes out of date.

Also if you are selling a home and have gotten an appraisal don’t think the buyer’s lender will use it. They will not! The lender holding the mortgage will order their own independent appraisal. Quite often sellers will waste their money on an appraisal thinking it justifies their asking price. Sorry, but it doesn’t work that way.

11. Can I use my city’s property assessment in place of an appraisal?

A property assessment covers a wide area and serves a different purpose than an appraisal. An appraisal is precise, designed to give the most accurate value of a home at the time of the appraisal. An assessment is intended to get a general idea of what property taxes should be.

Property assessors use their figures as a measuring stick for municipalities to collect a certain amount of money to cover expenditures to run a city or town. The assessed value and market value are two very different things. The appraised value is something different from the assessed value as well.

12. Is a Zestimate from Zillow the same as an appraisal?

NO! NO! NO! This cannot be emphasized enough a Zillow estimate is nothing like an appraisal and cannot be used as a substitute. In fact, using a Zillow home value is one of the worst ways to put a value on a property. Whether you are buying or selling a home, a Zillow Zestimate should be ignored. It is a worthless piece of information! There are times when the Zillow value is off by over $100,000 to the actual value.

Don’t be a DUMMY – using a Zillow value is like a bad car crash waiting to happen!

Source: MaxRealEstateExposure.com –  By 

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The Role of Appraisals How do the three main types of building appraisal work?

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.”

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InFocus: The Role of Appraisals Why accurate appraisals are more important than ever before

As certain Canadian real estate markets reach dizzying new heights, homebuyers are loading themselves with debt in order to secure their place on the housing ladder. Paying over the asking price is no longer an exception to the rule and, as a result, many Canadian homebuyers are playing a risky game with their financial futures. Brokers have an important role to play in ensuring that their clients don’t buy something they can’t afford and, in these tumultuous times of economic and real estate uncertainty, securing an accurate appraisal has never been more important.

“One of the opportunities that appraisers bring to the table when asked to give their opinion is not just understanding the dynamics of the valuation, but also understanding what that means within the current market conditions,” says Dan Brewer, President of the Appraisal Institute of Canada (AIC) and licensed mortgage and real estate broker. “There appears to be a situation where people are willfully under listing properties to create a frenzy, which is potentially misleading. It makes an appraisal all the more critical in the current market.”

Brewer has been monitoring a region in Ontario where homes are consistently selling for 15 – 30% more than list price; where paying a premium is the new norm. These premiums are being driven by current supply-demand issues, and in a situation where 20+ buyers are vying to purchase a property there really is only one winner: the seller.

Despite homes selling consistently over asking and accurate valuations becoming increasingly important, Brewer still notices a lack of broker knowledge around the appraisals process and the bodies who govern the industry. “The mortgage agent world had exploded in recent years and many people don’t have the specific training they need,” Brewer says. “The AIC has several professional development programs designed specifically for broker organizations to help them train agents and investors in the market place. It’s important that everyone, including brokers and agents, gets the education they need.”

Source: MortgageBrokerNews.ca

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Is that house really affordable? A reality check for first-time buyers

When you buy a first home, you know the cost of your mortgage and property taxes before you move in. But the broader range of costs is unknown by most buyers, and so is the likely rate of increase on these costs from year to year. (Peter Power/The Globe and Mail)

A year in the life of Canadian households:

  • Spending on water and sewer bills up 2.7 per cent.
  • Spending on natural gas for home heating up 3.9 per cent.
  • Spending on electricity up 4.8 per cent.
  • Spending on cellphone services up 10.7 per cent.

First-time homebuyers, study these numbers because they’re your future. When you own a home, your costs move ever higher over the years. That’s why you have to consider not only affordability today, but also in the year ahead.

When you buy a first home, you know the cost of your mortgage and property taxes before you move in. But the broader range of costs is unknown by most buyers, and so is the likely rate of increase on these costs from year to year. I created a Google spreadsheet to show the basic costs of owning – you’ll find a link to it in this column from back in May. Now, let’s look at how these costs might increase from year to year.

One way to estimate how much more you’ll spend is to look at the inflation rate, which was most recently pegged at 1.2 per cent on a year-over-year basis. Another is to look at how much more actual people are paying to run their homes and live their lives. A source of this data is Statistics Canada’s survey of household spending, which looks at expenditures both major (food and home maintenance) and minor (pet food and spending on movies). The freshest numbers were issued earlier this year and they cover 2010 and 2011.

To set the stage, average hourly wage increases have been running at about 2 per cent lately on a year-over-year basis. You’re ahead of the official inflation rate at that level, but what about the specific costs of owning a home?

Total household expenditures were up 3.1 per cent in 2011, but spending didn’t rise in all areas. For example, households spent 1.8 per cent less on food purchased at grocery stores, 2.7 per cent less on clothing and 2.2 per cent less on household cleaning supplies. In any given year, you will get some spending breaks as a homeowner.

More often, costs will rise from year to year. In 2011, Canadian households paid more for most utilities, notably cellphone service and Internet. Spending on property taxes rose 2.7 per cent, while home maintenance and repair spending jumped almost 7 per cent and home insurance spending rose 5 per cent. After the flooding this summer in Alberta and Toronto, you can count on more big home insurance premium hikes in the year ahead.

The survey of household spending represents the experience of just one year compared with another, but as a long-time homeowner I can tell you it’s on the money. So don’t hesitate to use the 3-per-cent overall increase in total household spending from 2010 to 2011 as a guide on what to expect from here on. Note: Financial planners often use 3 per cent as a long-term estimate of inflation. No savvy planner would use the latest 1.2 per cent rate because it reflects the unusual financial conditions of the past few years.

The most unpredictable factor in household spending is unfortunately the most important – mortgage costs. Check out what’s happened as a result of the half-a-percentage-point increase in five-year fixed mortgage rates earlier this summer. On a house with a mortgage balance of $350,000, the rise in rates would have bumped up the cost of monthly payments by 5.5 per cent, if you assume a 5-per-cent down payment and a rise in mortgage rates to 3.39 per cent from 2.89 per cent.

The average posted five-year mortgage rate over the past decade was about 6 per cent. You can cut that down to 4.25 to 4.5 per cent to factor in today’s rate discounting trends, but you’re still looking at a major cost increase over today’s rates. On that $350,000 mortgage, the jump from 3.39 to 4.25 per cent would increase payments by 9.4 per cent.

Recent trends in pay increases suggest you shouldn’t count on big pay increases to soak up the cost of higher mortgage rates and household costs down the road. This makes it imperative to buy less house than you can afford now, ideally much less. Cut yourself some slack.

Source; ROB CARRICK The Globe and Mail Published Wednesday, Aug. 14, 2013 7:44PM EDT

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Mike Holmes brings heightened integrity to home inspection business

Image supplied by Mike Holmes Inspections

When Canadian contractor Mike Holmes first appeared on his breakthrough TV series Holmes on Homes over 11 years ago, unscrupulous contractors everywhere started shaking in their steel-toe boots.

Holmes reminded skeptical homeowners what a building industry with integrity looked like, and it wasn’t long before he was determined to do the same for the home inspection industry.

“Working on Holmes on Homes, I was seeing a lot of problems that a home inspection should have caught — I’m talking major red flags,” says Holmes.
“When homeowners would tell me that they did get a home inspection [before buying], that really bothered me.”

Holmes didn’t like what he was seeing, especially when homebuyers tried to do their due diligence by getting a home inspection, then didn’t get the information they needed to make informed decisions about a prospective home.

“I’d look at a report and it wasn’t even worth the paper it was written on. And I was seeing this happen, over and over again. Couples would look at a house, get a home inspection, and then not even a year later — sometimes the same day they move in — the problems would start to show up. A leak here, mould there, dangerous electrical. These are not cheap fixes. Before you know it, the homeowners would practically go bankrupt just trying to make their home safe. That’s unacceptable.”

His plan was simple: ensure home inspections did what they were meant to do —protect the homeowner.

“I wanted a service that helped people make better choices for their health, their family and their future,” says Holmes. “You should be able to buy a home and have a pretty good idea of what it’s going to be worth five years down the road, 10 years. You should know if it has knob-and-tube wiring; if it’s losing heat; if the windows need to be upgraded or the roof replaced. To do that, you need good home inspectors: professionals who know what they’re doing and who know how to use the right tools. Because everything you see on the surface is the eye candy. What’s behind everything, that’s reality.”

So Holmes started a home inspection company, Mike Holmes Inspections, which brought heightened standards to the job.
inspector-crack

“Buying a home isn’t small potatoes,” he says. “It’s one of the biggest investments most people will ever make, and you’re leaving that up to chance? You need to know what you’re buying before you buy it. It’s like going to the grocery store and buying cans of food with no labels — you have no idea what you’re getting. And some people gamble their entire future that way. Not smart.”

Mike recruited top inspectors with the right credentials. This included everything from carrying liability insurance and having a background in home construction to being an accredited level 1 thermographer.

“It was important to me to set a standard that separated the professionals from the cowboys. You don’t want someone who was flipping burgers or balancing books last year to be checking out your house. You want a pro who understands how a home works, and who can spot the red flags; someone who knows how to use a thermal imaging camera and moisture meter to find the issues. That’s experience, plain and simple. You need someone who has experience — years of experience — working with homes.”

Once again, Holmes is changing the industry from the inside out, helping people who just want a home that is safe, healthy, and that lasts. And he’s doing it one home at a time thanks to a fleet of professionals across Canada —and soon in the United States — that share his determination to give homeowners what they deserve.

“This isn’t about saying that this guy’s good or this guy’s bad,” adds Holmes. “This is about doing what’s right.”

For more information, visit mikeholmesinspections.com.

This content was provided by Mike Holmes Inspections for commercial purposes. Postmedia had no involvement in the creation of this content.

Source: Special to National Post | August 1, 2015 | Last Updated: Aug 1 7:00 AM ET

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How much house does $846K get you? In Winnipeg a mansion, in Toronto a dump

A lot has been made about the “crooked house on Shaw street” that has been put up for sale for a staggering $688,800.

That’s an awful lot of money for a two-storey, fixer-upper that might have more value as a total tear down.

But what will the same amount of money get you in other cities across Canada?

In Vancouver, no stranger to sky-rocketing real estate prices, a two-bedroom, two-bathroom condo is $845,000   – plus monthly fees of $488.

Further west, in Victoria, $849,000 will get you two homes. The duplex, which also includes a third living space, faces a lake.

In Calgary, this has 3,500 square-foot home – in fancy-sounding Hamptons!  – has five bedroom and four bathrooms. It’s listed at $844,900.

At $100 more just a few hours north, this Edmonton home has four bedrooms, four bathrooms, and a fire pit.  It’s listed at $845,000.

In Regina, $849,000 will pay for a five-bedroom, three-bathroom home, full of 10- and 11-foot ceilings. And a wet bar.

In Winnipeg, a three-bedroom, three-bathroom home is listed at $848,000. It comes with two storeys, four parking spaces, and 2,559 square feet.

In Ontario, $846,000 goes a lot further once you leave Toronto. In Amherstburg, a 3,000 square foot home is just $844,900 — and it comes with another 1,100 square foot home on the same lot. The listing notes it’s perfect for in-laws. And that both homes overlook the Detroit River.

And in Cobourg, $845,000 will buy four bedrooms, five baths, and a short walk to the beach.

You could buy four homes in Montreal for the price of one in Toronto. A building containing four two-bedroom, one-bathroom units is listed at $847,000.

In Quebec City, a five-bedroom, two-bedroom cottage (in the Saint Foy area) is $845,000.

In St. John’s, Newfoundland and Labrador, a four-bedroom, four-bathroom home is $845,000.

Heading further into the Maritimes, most homes in this price range come with lake views. In Miramichi, New Brunswick, $849,500 will buy three bedrooms, four bathrooms, and, yes, stunning views.

Further east, in Hammonds Plain, Nova Scotia, this lakeview bungalow with three bedrooms and four bathrooms is $849,900.

Finally, in Charlottetown, $848,000 will get you lake access, three bedrooms, three bathrooms, and a saltwater pool.

Source: 680 News  ERIN CRIGER Jul 23, 2015 2:51 pm EDT

Broker calls for grow-op reform

Certain homebuyers are being unjustly punished by lenders for purchasing houses that should not be classified as grow ops, according to one industry player.

John Greenlee, a broker with The Mortgage Centre, has had trouble finding financing for houses that had been used as grow ops for marijuana, but he also tells of an instance when a house was improperly categorized one.

“(A Realtor I deal with) was trying to sell a “former Grow-op” where the previous tenant (from 12 years ago) was found to have had two or three plants growing in the bathroom. No modifications were made to the building like a traditional grow-op,” Greenlee wrote on MortgageBrokerNews.ca. “For all intents and purposes, other than the plant being illegal, it wasn’t anything different than someone growing a lemon tree in their living room.”

Greenlee told MortgageBrokerNews.ca the house was mentioned in a police report, which was enough for it to be considered a grow-op by lenders.

The clients had trouble selling the house as a result. And he thinks there should be more clarification around what is considered a grow-op.

For his part, he has had trouble finding financing for houses classified as grow ops.

“I don’t recall higher rates but lenders have certainly gotten tougher on the underwriting,” he told MortgageBrokerNews.ca. “We always disclose it to a lender; some lenders, including Scotia, won’t even do them anymore.”

Currently, grow-op houses are red flagged in CMHC’s database, and they require a number of requirements before it will insure the property for lenders.

Eugene Pilato, of Century 21, wrote about the requirements for insuring former grow-ops in a blog post, including a copy of an environmental audit, a certificate ensuring the property is habitable, a minimum down payment of 20 per cent, and an insurance premium of one per cent of the amount of the mortgage.

Source: MortgageBrokerNews.ca by Justin da Rosa | 22 Jun 2015