Appraisals: What, Why and Types of Reports
One of the most important documents associated with a real estate transaction is the appraisal. According to the Cambridge Dictionary, an appraisal for real estate purposes is “an examination of the value, condition, [and] qualities” that leads to a monetary value placed on the property. The condition of the property plays a role, as do the comparative values of similar properties in that area. Lenders take appraisals into consideration when determining whether to approve a mortgage application. Since the property is the security of the loan, if the borrower goes into default on the mortgage, the purpose of the appraisal is to determine whether a forced sale would pay back the lender for the amount given to the borrower.
Appraisers – Types of Designations and What They Do
The job of the appraiser is to provide an unbiased judgment of a property, leading to a monetary value that is reported to the lender. The Appraisal Institute of Canada offers two professional designations for appraisers. In both cases, the appraisal reports that these professionals generate come from thorough research and analysis into the property and comparable transactions.
The AACI designation means Accredited Appraiser Canadian Institute and allows the holder to fulfill any valuation and consulting assignment for commercial, institutional, residential, industrial, land, agricultural as well as special use property types.
The CRA designation means Canadian Residential Appraiser and allows the holder to fulfill any valuation and consulting assignment for residential properties with no more than four self-contained units for family housing. It also allows appraisal on undeveloped sites zoned for residential dwellings.
Holders of both designations have completed AIC’s Program of Professional Study. This involves university-based training, as well as an applied experience program. Candidates sit for an examination and an interview to determine professional competency and must have a degree from a recognized university in Canada.
Purpose of Appraisals
Appraisals exist to provide an objective, comprehensive estimate, assessment and/or professional perspective on a property’s quality, value or worth. Reports are generally prepared with a specific date to reflect the value of that property at that point in time; they also include the following parts:
- Effective appraisal date
- Signature and certification
- Intended use and purpose of the appraisal
- Relevant analysis of existing market conditions
- Identification of ownership and property
- Data analysis and interpretation
- Limiting conditions and qualifying assumptions
- Outline of methodology for appraisal
- Reconciliation for value conclusion
- Supporting materials, including plans, photographs, charts, maps and other documents as needed
The types of properties that receive appraisals include the following:
- Industrial Commercial Investment (ICI)
- Lands for Development
Appraisal reports can appear in a variety of forms, including the following:
- Narrative report. This is appropriate when the assignment requires significant research and reporting, and when modifications and/or exclusion of a Standard Rule are either not allowed or not encouraged in value assessment.
- Short Narrative Report. When an appraisal report can be more concise, this format is more appropriate. The level of detail is less thorough, and the report contains just a summary of data and analysis.
- Form Report. This is most commonly used with residential appraisals and comes in a standard format that combines brief narrative descriptions and checklists in the calculation of value.