Conventional mortgages - those that are up to 80% loan-to-value of the value of the property -- and are uninsured -- are often required to have an appraisal. The decision to approve a conventional mortgage, after all other lending criteria have been satisfied, is made on a property's fair market value, which is defined as the market value of an interest in land at the highest price reasonably expected when sold by a willing seller to a willing buyer after an adequate amount of time and exposure to the market.
So who determines the value of that property? One could argue that the market itself determines the value, which is true, but from a lender's perspective, that number must come from a third-party - the appraiser. An appraiser, who is specifically trained and has sufficient experience, will be asked to offer an independent, impartial written opinion of the property's value.
Realtors normally use a comparative market analysis (CMA) to evaluate a property's value based on local market data. Agents analyze listing and sales data for comparable properties in the area to recommend a price to list or to offer. Although appraisers use the CMA approach, they use it in combination with other factors to determine the value of a property.
While an major factor of the valuation will be the price agreed upon between the buyer and the seller of a property, the biggest aspect about appraisals are that they are done for a specific client -- the lender. Because real estate is the major security for mortgages, the market value estimate needs to be as accurate as possible.
There are a few different types of appraisals
- Sales Data Only Report - based only on the MLS sales and listing data. No physical inspection is performed on the property.
- Drive By Appraisal - an exterior examination only and used for mixed-use neighbourhoods, for higher-risk transactions and for low loan-to-values
- Full Appraisal Reports - a detailed interior and exterior inspection about the property and the neighbourhood.
The lender determines which type of appraisal is required and your Mortgage Broker (or Financial Institution) will order it. If your Mortgage Broker is me….I will most likely cover the cost of this for you.
As always please feel free to contact me with any questions or advice.
Jerry Sims, AMP
TMG – The Mortgage Group Canada Inc.