You’ve sold your house, but your offer is conditional upon an appraisal by the bank. Or you’re thinking of buying a commercial property with a storefront and an apartment, and you need financing from an alternative lender, who also wants an official appraisal. What does this mean?
Banks and other finance companies want to know that their investment will be safe – that there’s sufficient equity in your property to cover them in the event that you default on your loan. So they need to know just how much the property would be worth if it were sold on the open market.
To determine value, the financial institution will engage an appraiser. While some banks have in-house appraisers, in southern Ontario it’s more common for a bank to engage an independent appraiser with specific experience in the geographical area.
While, in some cases, the bank will accept an appraisal from a local real estate agent, they generally prefer to have appraisals done by appraisers who have been certified by the AIC (Appraisal Institute of Canada). AIC-certified appraisers are professionals who have to meet high standards of knowledge, professionalism, ethics and experience, so their valuations are generally considered to be more objective and accurate.
There are two AIC certifications:
CRA: Certified Residential Appraiser. CRA-certified appraisers can appraise residential properties and land or lots designated for residential development. These valuations are readily accepted by banks, other financial institutions and legal firms – but generally only for residential properties.
AACI: Accredited Appraiser Canadian Institute. Appraisers with the AACI designation can appraise any type of property, including residential homes, commercial, industrial and agricultural properties, with machinery and equipment. These appraisals are also readily accepted by banks, financial institutions and legal and financial firms.
What about my real estate agent? They say they can value my property.
Real estate salespeople and brokers can often have significant knowledge about properties in a specific neighbourhood or area, and the best ones are up-to-date on what the current market is doing. They can be useful when it comes to providing a provisional pre-sale value if you’re looking for an approximation or if high-ratio financing isn’t dependent on the value. However, real estate professionals don’t have a fiduciary duty to provide objective valuations, and they aren’t always sufficiently knowledgeable to provide a detailed analysis about agricultural, commercial or industrial properties. This can cause challenges when it comes to legal matters later.
Regardless of the appraiser the bank chooses to value your home, the basic process is the same: The appraiser will visit your property, take a good look (and photographs) inside and out, and then compare your home with others which have recently sold in the neighbourhood in order to determine the market value for your property.
It doesn’t seem complicated – but appraising a property involves years of experience, training and knowledge, about house construction, land values, market conditions and the overall economy.
Want to know more about residential appraisals? Get in touch.