Real Estate Appraisal

What is a real estate appraisal?

A real estate appraisal is an impartial estimate or opinion of value, usually written, of an adequately described property, as of a specific date, and supported by the presentation and analysis of relevant data.

The opinion of value is made by a person who has sufficient knowledge and experience to accurately estimate its value.  In Canada real estate appraisals are typically completed by qualified members of the Appraisal Institute of Canada and have either a CRA (Canadian Residential Appraiser) or an AACI, P.App. (Accredited Appraiser Canadian Institute).

Real estate appraisal reports should all include the following:

1. the estimate of value
2. the effective date of the appraisal
3. the certification and signature
4. the purpose of the appraisal
5. the qualifying conditions
6. the condition of the neighborhood
7. an identification of the property and its ownership
8. an analysis and interpretation of the data and the assumptions made
9. the processing of the data by one or more of the three approaches to value
10. other descriptive support material such as maps, plans, charts, photographs, etc.

How is the value estimated?...

There are typically three approaches to value used to estimate market value and include the Cost Approach, the Income Approach and the Direct Comparison Approach.

The Cost Approach estimates the cost to build a new building using either replacement or reproduction cost, at current prices, subtracting accumulated depreciation and adding the estimated land value. This approach can be used when estimating the value of both residential and commercial property.

The Income Approach is based on the theory that value is the present worth of the income stream which the property is capable of producing when developed to its highest and best use.

The net operating income from the property is capitalized into value by an appropriate method and rate. This approach is typically used for commercial property which would also include multi family developments such as apartment, etc. This is not an approach which would be used if you are purchasing a home.

The Direct Comparison Approach is based on the theory that an informed purchaser would pay no more for a property than the cost of acquiring another existing and equivalent property.

This approach to value is what most people would associate with when an appraisal is completed for a home purchase. The estimate of value is based on comparing the subject property to other similar properties in the area.

Differences between the subject property and the comparable property is reflected in either an upward or downward adjustment to the sale price of the comparable property. This approach to value is used for both residential and commercial properties.