Two pieces of property are seldom identical. When a professional appraiser writes up a report the estimate of value is given as an opinion, not a scientific fact. Most lenders will require an appraisal to protect their security before a final commitment is made to provide you with financing.

Reasons for obtaining an appraisal

The main reasons you might want an independent appraisal would be to determine:

✪     The value of a property for financing purposes (your lender will require this).
✪     The value of a property at death for estate purposes.
✪     The value of a property when converting the use from principal residence to investment (rental) use, or vice versa. This would be for Canada Revenue Agency capital gains determination purposes, unless you are exempt from this provision. Check with
✪     A reasonable asking price for sale purposes.
✪     The amount of insurance to carry.
✪     Preparation for a marital separation agreement or divorce.

There are several professional designations for property appraisers in Canada. They subscribe to uniform academic, professional, and ethical standards, and are regulated by their professional associations. The most common national designations are AACI (Accredited Appraiser Canadian Institute) and CRA (Canadian Residential Appraiser), both awarded by the Appraisal Institute of Canada.

DETERMINING THE VALUE OF A CONDO
Here are some of the basic methods or rules of thumb used by professional appraisers, real estate lenders, or home buyers to determine the fair market value of a condo. 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 between $150 and $300) for the average house or condo purchase. The lender arranges for the appraisal.

MARKET COMPARISON APPROACH
In effect, this approach is comparison shopping. It 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, etc., you want to attempt to obtain comparables as closely as possible. You want to have the sale dates as current as possible so that the comparison reflects the same market conditions.

Generally speaking, when an appraiser is doing a market comparison appraisal, he or she compares recent sales of similar properties, similar properties currently listed for sale on the market, and properties that did not sell before the listing had expired. The limitation of the market comparison approach is that similar properties may not be available for comparison in a particular situation. Also, it is difficult to know the motivations of the vendors of the comparable properties, so in some cases the sale price might not reflect the fair market value.

For example, if you are comparing a condominium for sale against two other identical condos in the same complex sold recently, that will give you a fairly close comparison. You could calculate the cost per square-foot of the two recent condo sales and compare with the cost per square-foot of the one you are considering. If that latter price is higher, you want to know why. Perhaps it has a better view, is on a higher floor, or the previous owner made a lot of interior decorating changes to improve the condo. The point is that the market comparison approach does have its limitations and provides general guidelines only.

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 using the cost approach. It is an easier formula when buying a single-family house than a condominium.

Regardless of the appraisal process, what you eventually decide to pay will depend on the market dynamics at the time, and your intuitive sense of relative value based on your own comparison and competitive shopping. CL