When assessing the market value of a property, the chartered appraiser follows a rigorous process aimed at objectively determining the price that a knowledgeable buyer would normally be prepared to pay to acquire a property in an open and competitive market.
To establish this market value, the method used varies greatly depending on the type of building being appraised. An appraiser will not carry out the same analysis when valuing an income-generating building on a commercial artery in a major urban centre as when valuing a single-family home in a suburban residential neighbourhood. The chartered appraiser must therefore possess complex technical knowledge and know how to adapt to each situation. This knowledge is applied through an analytical and methodical mind, in order to draw objective conclusions and formulate a well-reasoned opinion of a property's market value as of a given date.
Defining the mandate
Before beginning the analysis, the chartered appraiser must clearly define the mandate with the client. The first step is to establish the purpose of the appraisal. For example, does the client wish to obtain mortgage financing, or to secure an expert opinion following an expropriation? Depending on the purpose, the required services must be identified.
The chartered appraiser can then advise the client by proposing the appropriate type of report to fully meet their expectations. Based on the type of report and the workload involved, the appraiser will estimate their fees and provide the client with a delivery timeline for the report. If both parties agree, a service offer is sent to the client, who returns it signed. This service offer becomes the contract between the appraiser and the client, and can prevent many unpleasant surprises.
Gathering data on the subject and the site visit
Once the appraisal mandate has been defined, the chartered appraiser gathers all the documents needed to value the property: assessment roll, municipal taxes, residential and commercial leases, operating expenses, origin of the ownership title, architectural plans, zoning by-laws, certificate of location, and so on.
After compiling the necessary documents, the chartered appraiser visits the property to be appraised. It is worth noting that the visit of the subject is not an exhaustive inspection and is not intended to identify every defect in the property under study. The goal is to determine the level of wear while validating the dimensions, the main components, the quality of the materials, the functional utility, and so on. The purpose of the property visit is to form an opinion of its overall condition.
Following the visit of the subject building, the chartered appraiser tours the neighbourhood to identify the strengths and weaknesses of the immediate surroundings: public transit, essential services, schools, the highway network, railways, and so on. It is important to know the subject's environment well, as it significantly influences the value of a property.
Analysis and determination of market value
After visiting the property and its neighbourhood, the chartered appraiser is well equipped to decide how to proceed in determining the subject's market value. Generally speaking, there are three appraisal methods used by chartered appraisers: the cost approach, the comparison approach and the income approach. Except in certain cases, such as a divided co-ownership (condominium) or an insurable value assessment, the chartered appraiser must use at least two of these methods to determine the market value of the building being appraised. Here is a brief overview of the methods used by chartered appraisers:
Comparison approach: this method estimates market value by observing similar properties that have sold recently in areas comparable to the one under study. Although this method is considered direct, since it comes from the market and reflects it, the comparison approach has its limits, mainly because the properties sold are never identical to the subject. Adjustments are therefore often required, and these can be very complex to quantify.
Income approach: this method applies when a building generates rental income. It estimates a property's market value based on the net income it can generate and on the returns the market requires for that type of investment (for example, office buildings, multi-unit residential buildings, and so on). In this way, the subject's market value equals the present value of the anticipated future benefits.
Cost approach: this method is used mainly when a property is a recent construction, or when the comparison or income approaches are difficult to apply (for example, a single-purpose building). Under the cost approach, the depreciated value of the building erected on the land and its site improvements (such as parking) is added to the market value of the land.
After carefully applying the methods appropriate to the type of building being appraised, the chartered appraiser reconciles the value indications obtained from each method in order to justify the most probable market value of the property. Based on the reliability of the available data, the type of building being appraised and the appraiser's experience, they determine which value indication yields the most convincing result. It is at this point that the appraiser establishes the property's final value.
Conclusion
It is important to note that the chartered appraiser must comply with very strict practice standards and a code of ethics designed to protect the public.
In addition, the chartered appraiser carries professional liability insurance, which offers clients an added guarantee. Their broad field of expertise and diversified services allow clients to make informed decisions in a variety of situations. Whether acquiring a property, establishing a building's rental potential or contesting a property's municipal assessment, the opinion issued by the chartered appraiser is well-reasoned, reliable and impartial, making them a valuable real estate advisor.