BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

An appraisal is not at all the same thing as a property assessment or a market evaluation. There are two kinds of actual appraisals available today: a detailed appraisal by a professional appraiser or an AVS (automatic valuation). What’s the difference?

What's THAT property worth, do you think? Taking a wild guess won't serve anybody's interests. To get the value exactly right, one actually has to study the market.

To find out the current actual value of a home, you can observe what it sells for: what a willing buyer will pay for it to a willing seller – on a level playing field of equal motivation and circumstances. If the house hasn’t recently sold, there are other ways to determine its market value?

There are various definitions of market value around – but it all revolves around the sale of the property. To valuate a property that hasn’t sold (yet) is not easy. One needs to imagine what it would sell for and opinions (because that’s what they would be) will vary. To do this as precisely and objectively as possible is a hard, responsible job.

A professional appraiser goes to school for quite some time. They follow a fairly scientific approach to the valuation of real estate; then they use various methods to come to an (approximate) property value. Still, asking three different appraisers to pronounce an opinion on one property might give you three different numbers. This is indicative of the objectivity factor – it’s virtually impossible to make a property appraisal a hard science.

Never listen to people who know nothing about how to appraise properties yet will volunteer to pronounce an opinion of value on your home (or another).

SOMETIMES, A DETIALED APPRAISAL IS WHAT YOU NEED

There are instances in which you need a detailed appraisal of a property. Sometimes, however, you only need a valuation that’s more or less approximate. Both types of valuations are in existence and have their advantages.

In certain situations, you, your bank, the tax man or others may require an appraisal of a property that’s as precise as possible. There could, for instance, be legal reasons for that. When people are splitting up an estate, when assets are being divided in a family situation or when fiscal reasons require it, you need to be as specific as possible. The purpose is to not disadvantage anybody – to be fair to all. Taking an appraisal of a property requires a site visit and the study of various comparable properties. The appraiser will produce a report that has quite a bit of legal value. Obviously, it costs a lot of time and therefore also Hundreds of Dollars to do this specialised, professional job right.

Large data banks hold tons of information about real estate, assessment values, recent sales statistics, neighbourhood information and local/regional market trends.

WHEN ALL YOU NEED IS AN APPROXIMATE VALUE

There are instances that a home’s exact value is not particularly relevant. Those would be situations where an approximate value estimate is good enough for those involved. An automated valuation system (AVS) is often used as a quick way to value a property without doing a full human appraisal.  AVSs are basically massive computer databases of public records. They also use comparable sale data to value billions of dollars of real estate every year, and they do it in seconds or less.

An example of an approximate valuation being “good enough” would be a bank that’s loaning you $400,000 on a $750,000 property. All they want to know is a general valuation – whether it’s $740,000 or $765,000 doesn’t matter.

The question, in many appraisal cases, is only if the property value exceeds a certain threshold. This is when a market value appraisal merely boils down to a yes/no answer.

The bank must look out for its financial interests and that of its shareholders. They want to be sure that you are a suitable candidate to borrow money for your purchase.

WHAT A BANK WOULD WANT

Banks look for security. They want you to have enough income so you can pay off the mortgage loan. They want you to have a sufficiently large down payment so you have a vested interest in the property. They want to make sure that your payment history is stable. They also want to make sure that the property is worth enough.

Banks are pretty money-savvy. For instance, if the government-assessed value for property taxes is already more than enough to cover the loan, then they know that they’re probably quite safe. This is because people tend to object when their government property assessment is too high – nobody wants to pay more taxes than they must. Property tax assessment information is a matter of public record – the information is easy to get for the bank. The same applies to sales in the area, which may fall in the same price range. In other words, your postal code may be an indication of the property value. Electronic (automated) valuation systems use other market date as well, such as trends and forecasts.

Given their efficiency, AVSs have been catching on with lenders. While they’re not perfect (some question their accuracy and their occasional fraud allowance), AVSs have two compelling advantages: speed and cost. Since robots do the work, the cost is minimal. That’s what we see in AVS appraisal systems.

Our world is fast-moving. Instant gratification has become the norm, also in the mortgage business. That's another reason why speedy valuations are so popular.

SOMETIMES SPEED AND COST ARE VERY IMPORTANT

Lenders and mortgage professionals love pushing out fast approvals without additional appraisal conditions. There are many reasons for that. If you’ve got a tight closing, or you are a banker/broker keen on prompt service, then choosing an AVS lender is a definite stress reliever. There’s no waiting for appraisal appointments to be booked, waiting for the appraiser to view the property, waiting for the appraisal report, waiting for the underwriter to review the appraisal report; instead it’s all almost instantaneous. On the cost side of things, AVSs are obviously a clear winner. If they’re not free altogether, they’re as cheap as $50-$75. Compare that to a human appraisal of several Hundreds of Dollars.

For most clients, free is pretty appealing. That’s especially true on a refinance. Sometimes applicants are still required to pick up the cost of an appraisal, only to find out their house isn’t quite worth enough to support their desired loan amount.

Speaking of cost, very few lenders charge the borrower for AVS appraisals. Other things being near-equal, most mortgage professionals clearly prefer lenders with free AVSs. Some financial institutions also absorb the cost of a human appraisal – although sometimes only to a certain maximum. It’s prudent to ask about appraisal fees when applying for mortgage financing because there are certain differences. There is also some “discretion” which is probably just a polite word for wiggle room.

It's always a good idea to quickly read up on mortgages before you need to talk about one, deal with one, apply for one, renew one or even close one.

MORE mortgage and finance-related blog articles can be found here:

Problematic mortgage behaviour: http://www.mennorealty.ca/Blog.php/off-the-rails

Mortgage terminology here: http://www.mennorealty.ca/Blog.php/big-bank-terms

About list price and offer price: http://www.menno.ca/?p=19465

The 80% rule in mortgages: http://www.mennorealty.ca/Blog.php/80-or-81percent

What does that really mean: an Open House? http://www.menno.ca/?p=19478

Market evaluation, refinance and renewal: http://www.mennorealty.ca/Blog.php/renewal-1