Real estate transactions are complex and involve significant sums of money, making it important to have accurate information about the property being sold. Appraisals are a little known, critical component of real estate transactions, as they provide an objective estimate of value through a combination of property analysis, extensive market data and the appraiser’s experience. Here are four reasons why appraisals continue to be an important part of real estate transactions:
1. Lender Protection: Lenders need to know the value of the property they are lending money against to ensure that they are not providing more money than the property is worth. An appraisal helps protect lenders from overvaluing the property, which could lead to a loss if the borrower defaults on the loan. CRA and AACI designated appraisers are part of the Appraisal Institute of Canada (AIC), who provides insurance for members in good standing and holds members accountable to CUSPAP.
2. Assists Buyers and Sellers: An appraisal assists buyers and sellers in determining the fair market value of the property. This can help sellers set a realistic asking price, and buyers make informed decisions about the property’s value.
Recently I was involved in appraisal of an office building where the owner had plans to sell the building to an associate for the BC Assessment value. BC Assessment values are generated based on statistical models and, and their purpose is for taxation. In our appraisal of the building, the current market value was found to be nearly $100,000 higher than the assessed value based on localized and recent market activity. Appraisers access a wide variety of datasets as well as their own data bank from primary sources to do be able to do this.
3. Objectivity: Appraisals provide an objective and unbiased estimate of the property’s value. This is particularly important when there is a disagreement between the buyer and seller about the property’s worth. In the case of business restructuring, divorce settlements and other family matters an appraiser can come as an unbiased 3rd party and use detailed analysis with market evidence to provide an estimate of value. AACI and CRA designated appraisers are required by the AIC to take part in continuing education and professional practice seminars.
4. Risk Mitigation: Appraisals help reduce risk in the market by ensuring that properties are worth what the buyer and lender are paying. A full appraisal involves a physical site visit at the property. In the past, we’ve had an experience where an entire section of the improvements was missing exterior siding. This wasn’t mentioned by the seller. In an instance like this, the lender needs to adjust the terms of their loan based on the condition of the home. By continuing physical inspections of properties and marking a property to market comparables, appraisers are an active deterrence to fraud and negligence within our financial system.
The purchase and sale of real estate involves large sums, often five to ten times larger than the cash down payment. Appraisals protect the client who is party to the transaction whether they are the buyer, seller or lender. One poor decision can cost the equivalent of hundreds of appraisals. They provide an objective and unbiased estimate of the property’s value, which is necessary to make informed decisions. They also reduce the risk of fraud as the property undergoes a review of the physical property, zoning, survey plans and title document among other things. If you are involved in buying, selling, transferring, or financing real estate, Quality Appraisals can bring confidence to the deal for you.
