How Are Property Values Determined?
What are the different types of property valuation methods?
Properties get evaluated by an appraiser to determine the value of the property. There are 3 different types of property valuation methods an appraiser will use:
The first is a desktop appraisal, a desktop appraisal relies on the MLS (Multiple Listing Service) reports including data on recent sales on recent listings. There is not a physical inspection on the property with a desktop appraisal.
The second type is a drive-by appraisal. This appraisal is based on the same information as a desktop appraisal but there is also an inspection of the exterior of the property as well. A drive-by appraisal allows for the appraiser to view the condition of the neighborhood the house is located in and the condition of the exterior of the house.
The final type is the full appraisal. This is the appraisal of choice for most lenders because you get the most accurate valuation. A full appraisal includes a full inspection of the exterior and interior of the house.
What factors can determine property valuation?
There are 3 approaches appraisers use when calculating the property value:
The first approach is the income approach. The income approach calculates the value of a property that is producing an income, for example, apartment buildings and commercial properties. This method takes the net operating income from the property and applies a capitalization rate to that income which then gives the property’s market value. This approach is usually is used for commercial appraisals.
The second approach is the cost approach. The cost approach calculates the value of the property based on the cost of replacing it. To find out the value of the property the appraiser takes the cost of rebuilding the structure, minus the depreciation, plus the cost of the land, which will give you the property value. This approach is usually used for insurance appraisals. For example: what would it cost to build this house if it burnt down?
The third approach is the direct comparison approach. This is the most used method when determining property value for mortgage financing. The appraiser will take three comparable properties that are similar and have recently sold in the same neighborhood to value the property. The appraiser will make adjustments to the value of the house based on the different characteristics of a house. For example, if one house has a pool and a finished basement it will be valued higher than one that doesn’t. This approach is usually used for residential appraisals.
Why do property values matter?
Property values matter for many reasons:
First off if you are selling your house you will want to know what it is worth so you can put the right price on it.
Secondly, most lenders will want to know the value of your property when you want to refinance to determine the LTV (loan to value) so you don’t exceed 80% LTV. Loan to value can be different for different lenders. In most cases, it is 80%.
The next reason is when purchasing a home, lenders want to know the appraised value of the home so they know you are not overpaying for the home.
Other examples would be insurance to determine the replacement cost. Or in the instance of a divorce to determine the equal division of the house.
If you have any other questions about property valuations call the shopmortgages.ca team at 519-250-4848 to talk to a team member.
