Tag Archives: appraisals

Real estate market uncertainty is forcing appraisers to take a second look

The potential for rapidly dropping prices in southern Ontario is forcing appraisers to have a second look at properties they have already assessed to see how much the market has shifted.

Claudio Polito, a Toronto appraiser and principal owner of Cross-town Appraisal Ltd., says lenders basing mortgage decisions on value, as opposed to income and credit history, are really trying to stay on top of a market that appears to be changing rapidly.

By his estimates, prices in the Greater Toronto Area have dropped anywhere from five per cent to 15 per cent over the last 30 days. The next set of statistics from the Toronto Real Estate Board are due out Monday and will mark the first full month of data since provincial changes to cool the market that included a tax on foreign buyers.

“Lenders I deal with they want to know if your property is still worth $1 million if they are loaning you say $650,000,” said Polito. “They don’t base it on anything else. We have to be precise because it’s not a bank, (smaller lenders) can’t afford to lose a dollar.”

 

It wouldn’t be the first time, appraisals have lagged purchases prices — a phenomenon that previously caught some Vancouver buyers by surprise when it was time to close.

A lower appraisal could increasingly be an issue for people with previous deals, not yet closed, in Toronto, especially when buyers are coming up with only the minimum 20 per cent down payment for a non-government backed loan.

If you buy a home for $1 million with $200,000 down, you need an $800,000 loan to close. But if your appraisal comes in at $900,000, your financial institution will only agree to a maximum $720,000 loan based on 80 per cent debt to 20 per cent equity. Those buyers are left searching for a second mortgage — at a higher rate — to get the extra $80,000 if they can find someone to loan them the money.

“We are seeing some people walk away from deals,” said Polito, because they can’t close — a move that comes with myriad problems if the sellers seek legal damages. “What we are seeing is properties sold in January and February, values are still there but if it sold in March, it is very hard to support the value.” Toronto prices rose 33 per cent in March from a year earlier.

 

Keith Lancastle, chief executive of the Appraisal Institute of Canada, said the warning for buyers is probably not to get into bidding wars if they don’t have a cushion to come up with a higher down payment. “I would expect it’s quite routine where the appraisals are being done and it’s coming in at lower than people hoped to see.”

He says the volume of sale in Toronto makes it easier to find comparable sales but the pace at which the market is changing makes it “tough to keep up” and that forces appraisers to look at some data and consider whether it’s an anomaly or part of trend.

A more difficult market to assess is one like Calgary, which has seen transactions drying up, making comparisons hard to find.

“The more valid data you have access to, the simpler the task of preparing the appraisal becomes,” said Lancastle. “When the Calgary market was slow, the lender would say we want sales that are within the last 90 days for comparable. If nothing has sold for comparable for 90 days, you ask the lender if they want to extend the time or the geographic window.”

Nicole Wells, vice-president of home equity financing at Royal Bank of Canada, said her institution is relatively conservative when it comes to appraisals to begin with — limiting the impact of a shifting market.

“Given how quickly prices rise, you really have to make sure you are adequately appraising the property,” said Wells. “We always promote affordability, making sure you know what you want and what you can pay. It’s really dangerous to get into a bidding war (with the minimum down payment).”

Source: Financial Post – Garry Marr | June 1, 2017 

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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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