Appraising the value of a property is more an art than a science. Two pieces of property are seldom identical, and it should be noted that when a professional appraiser writes up a report, the estimate of value is given as an opinion, not a scientific fact. This is helpful to you as a basis for negotiation with the owner. The reliability of the appraisal, though, is directly related to the level of competence, integrity, experience, and objectivity of the appraiser, and the accuracy of information obtained. Real estate appraisal is only as reliable as the assumptions that are made. There are distinct benefits of having an appraisal, especially a professional appraisal.

Here are some of the basic methods or rules of thumb used by professional appraisers, real estate lenders, or homebuyers to determine the fair market value.

If you are buying a condominium as a principal residence, you would normally only be interested in the market comparison approach and cost approach. The average of these two estimates is what most lenders use for value appraisal purposes. The lender then gives mortgage funds based on the purchase price or appraised value—whichever is lower. The purchaser pays for the appraisal cost (usually $150 to $300) for the average house or condo purchase. The lender arranges for the appraisal.

MARKET COMPARISON APPROACH
In effect, this approach involves a comparison of similar properties to the one you are considering. Because no two properties are exactly the same due to age, location, layout, size, and features, you want to attempt to obtain comparables as closely as possible. You want to have the sale dates as current as possible so that comparison reflects the same market conditions. You may have to make adjustments to the comparable properties to make the comparisons more realistic in determining prices.

For example, you may have to make price adjustments in the comparison properties for such matters as the circumstances of the sale (such as a forced sale due to financial problems, order for sale, or foreclosure), special features of the property (such as a flower garden, shrubs, or an arboretum), and location of property (a view, privacy).

The market comparison approach lends itself to situations where the properties are more numerous and there are more frequent sales, and therefore they are easier to compare. Condominiums, single-family houses and raw land are the most common types of properties to use the market comparison method. At least it gives you a feeling for the appropriate value.

COST APPROACH
This approach involves calculating the cost to buy the land and to construct an equivalent type of building on the property you are considering with appropriate adjustments, and then comparing the end prices. There are various steps involved in arriving at a figure with this approach. It is an easier formula when buying a single-family house than a condominium.

For single-family houses and condominiums, the appraiser usually arrives at an estimate of value as of a certain date by adding the market and cost approach values, and dividing by two. The limitation of the cost approach is depreciation which might be difficult to estimate correctly. In addition, construction costs vary, depending on location, supply and demand, and inflation. Again, the cost approach value is an estimate only.  CL

Douglas Gray, LL.B., formerly a practicing lawyer, is the author of 25 bestselling books, including 101 Streetsmart Condo Buying Tips for Canadians. His website is: http://www.homebuyer.ca.