7 myths about residential appraisals

by REP08 Jul 2016
Obtaining a reliable appraisal that is unbiased, independent, and based on comprehensive research and analysis is key to the success of this transaction. “There is an overall misunderstanding about how an appraiser arrives at a market value, sometimes leading to a misconception that the ‘appraiser killed the deal’,” says Keith Lancastle, CEO of the Appraisal Institute of Canada. “We need to do a better job at educating Canadians about the important role a designated appraiser plays in protecting consumers and mitigating risks for the lending industry.”
The following are some common myths that the Appraisal Institute of Canada would like to debunk.
Myth #1: The purchase price of the property is the same as the appraised market value.
Reality: The appraised market value may not be the same as the selling price of the home – it may be higher; it may be lower. Individual real estate markets can be volatile and are impacted by the economic conditions of the market. For example, in a seller’s market, or when there are multiple offers on a home, an inflated selling price above the appraised market value can result.
Bidding wars may skew the true market value of the home when similar substitute properties are not available in the market. A multiple-offer scenario may be good for the seller, the real estate agent and the mortgage broker in the short term, but in the long term, the purchaser may face challenges when selling the property in less active market conditions.
Having an opinion of value that is obtained through comprehensive research of the market over time provides the property owner and lender with a realistic value. Furthermore, the appraiser may view the purchasing contract in order to ensure that chattels, or personal property, are not included in the agreed purchase price so that the appraised value can truly reflect the value of the real estate only.
Consumers and lenders should be wary of selling prices that are inflated – either through multiple offers or other local market factors.
Myth #2: Appraisers only consider past market/sales data when determining the value of a property.
Reality: To provide a reliable market value, AIC-designated appraisers consider a number of factors, such as:
  • Sales of the subject property within the last three years
  • Past sales of properties comparable to the subject property
  • Comparable properties that are currently for sale
  • Current market conditions
Adjustments are made based on the analysis of comparable properties, which rely on market-derived elements of comparison, including property size and other factors.
One of the key requirements under Canadian Uniform Standards of Professional Appraisal Practice [CUSPAP] is for the appraiser to conduct a three-year sales history and a one-year listing history search and analysis of the subject property. This data considers private sales (non-MLS) transactions as well as those on MLS. Other data sources, such as title and property registries, are also reviewed to ensure the most comprehensive and reliable market value is obtained.
Myth #3: The appraiser is influenced by the client’s need for a specific value.
Reality: An AIC-designated appraiser has a professional and ethical responsibility to provide an independent and unbiased opinion of the value of a property. Their work will produce an estimate of market value as the most probable price level – irrespective of the selling price or a desire to ‘meet’ a certain value.
All AIC members must comply with AIC’s CUSPAP, Code of Conduct and Regulations. As professionals, AIC members are obligated to prepare their work in compliance with these standards.
Myth #4: The appraisal can be shared with the homeowner since they pay the appraisal fee.
Reality: The appraiser’s client is the individual, entity or organization for whom the appraisal is prepared (either verbally in person, or by telephone, fax, internet or email), not necessarily the person or organization that pays for the appraisal.
For example, if a mortgage broker requests an appraisal, they may be identified as the party ordering the report in the ‘Requested By’ section to make it clear that they are neither the client nor the intended user. The client will be identified by the appraiser – for example, the lending institution name. The intended user section of the report is the area of the appraisal where an individual, entity or an organization may be designated to rely on the appraisal report as acknowledged and confirmed by the client. Appraisers pledge to uphold the confidential nature of the client relationship, similar to other professional confidentiality agreements with lawyers and accountants. This relationship is outlined in CUSPAP.
The appraisal report will not be shared with the homeowner without the consent of the client.
Myth #5: Appraisal management companies are the appraiser’s clients.
Reality: When a lending institution requires an appraisal report on a property, they will often engage an appraisal management company [AMC] to facilitate the appraisal process on their behalf. AMCs offer their clients (typically the lending institution) a single point of contact for the management of the appraisal function and have a contractual relation with both the lender and the appraiser. Depending on the contractual arrangement between the appraiser and the AMC, there may be limits to the communication and disclosure that the appraiser can make to the client and/or to the lender.
Myth #6: Automated valuation models are more accurate than an on-site appraisal.
Reality: Automated valuation models [AVMs] provide an assessment of property values based on the compilation of sales data. Although they provide some important information, an over-reliance on
AVMs poses a risk for lenders, consumers and the financial system.
Why? Well, a value generated by an AVM will not be able to consider certain elements that are critical to a value of a property, including:
  • Maintenance provided to the property and its current condition
  • Updated data on the location of the property and its surroundings
  • Intangible features of the property
The best option to minimize the lending risk for residential properties is to have an on-site appraisal and on-site collection of data conducted by a qualified appraiser. An on-site appraisal will determine the existence of the property (including the buildings), the occupancy, the condition of the property, the neighbourhood characteristics and other key factors that are critical to the value. This due diligence ensures that the decision-maker has a reliable appraisal report with a well-supported opinion of value.
Myth #7: When a homeowner is completing renovations, they can expect that the value of their home will rise proportionately to the investment.
Reality: The return on investment depends on the added value of the renovations, the quality of the renovations and the neighbourhood’s market conditions. Unique designs or improvements that are uncommon for a particular market may even adversely impact the selling price of a home; therefore, the full return on the investment will likely not be obtained.
Obtaining an expert opinion of value from an appraiser will provide an objective perspective on the marketability of the property.

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