What is a Canadian Mortgage Appraisal?

Appraisal is a document that gives an estimate of a property’s fair market value. An appraisal may be required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.

The appraisal is performed by an “appraiser” who is typically a licensed individual trained to render expert opinions concerning property values. In an appraisal, consideration is given to the property, its location, amenities as well as its physical conditions.

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

1. Cost Approach:
   In this approach the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
2. Sales Comparison Approach:
   In this approach the appraiser identifies 3-4 comparable properties in the neighbourhood which have recently been sold. Ideally, the properties are close in vicinity (within a 1/2 mile radius of the subject property) and have sold within the last six months. The appraiser then compares the sold properties to the subject property. The factors used in the comparison include square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
3. Income Approach:
   In this approach the potential net income of the property is capitalized to arrive at a property value. This approach is suited to income-producing properties and is usually used in conjunction with other valuation methods. The process of converting a future income stream into a present value is known as capitalization.

After thorough exercise of the three approaches, a final estimate or opinion of value is correlated. When evaluating single-family, owner-occupied properties, the sales comparison approach is most heavily weighted by an appraiser.

Who owns the Appraisal?

Even though the borrower pays for the appraisal, the mortgage company owns it. This is because the mortgage company orders the appraisal on the borrower’s behalf, and the appraiser lists that mortgage company on the appraisal report. However, the borrower has the right to receive a copy. It is at the mortgage company’s discretion whether or not to give the borrower the original appraisal.

Can I use another mortgage company even after the appraisal has been completed?

Yes. In most cases, changing your mortgage company does not mean you will have to pay for another appraisal. The first lender can transfer the appraisal to your new lender. Some appraisal firms may charge a small fee, however, because there is clerical work involved in editing the appraisal to reflect the new mortgage company. This fee is called an “Appraisal Retype Fee.” The original mortgage company has the right to refuse to transfer the appraisal to another lender. In this event, you will need to get a new appraisal.

Who determines the market value of a property?

The seller of the property is the person who sets the price of the property (specially residential property), and not an appraiser. This is because sellers normally do not order an appraisal when selling their homes. Sellers wish to obtain the highest selling price possible for their homes and hence do not want to be bound by the appraiser’s assessment of their home. The real estate agent, who receives a percentage of the price as compensation and often represents the seller in the transaction, normally assists the seller in setting the sale price.

The real estate agent performs a comparative market analysis (CMA). The appraisal laws allows the real estate agents to perform CMAs without an appraiser’s license or certification. A CMA is a necessary part of the agent’s preparation for a listing and consists of examining sales of properties in the area to arrive at a listing price. The reliability of the CMA depends upon the agent’s experience and the characteristics of the property and the surrounding area. Typically, the agent will suggest a selling price to the seller based upon the analysis. However, the seller may not accept that price and choose to list the property for a higher price.

Assisting your Canadian Mortgage Appraiser

In order for the appraiser to perform his/her job properly there might be requirements for additional information. Some information that may be requested is as follows:

• What is the purpose of the appraisal?
• Is property listed for sale and if so, for how much and with whom?
• Is there a mortgage? If so, with whom, when placed, for how much, type of mortgage.
• If it is an income-producing property, a breakdown of income and expenses for the last year or two and a copy of lease might be required.
• Provide a copy of deed, survey, purchase agreement or other pertinent papers pertaining to the property.
• Provide a copy of current city assessment.