Financing appraisal is a key process when applying for a loan to purchase real estate, whether it is for a residence, a commercial property, or a construction project. This type of appraisal aims to determine the market value of the property to help financial institutions make informed decisions about granting the loan.
To better understand real estate financing appraisal, here are the essential elements to know.
Real Estate Financing Appraisal: Definition and Purpose
Financing appraisal, also known as real estate appraisal, is an analysis conducted by a certified appraiser to determine the current value of a property. Financial institutions use this estimate to ensure that the loan amount matches the actual value of the property.
The estimation of real estate property helps reduce risks for the lender in case of non-payment.
Who Can Conduct Real Estate Appraisals?
They are conducted by a certified real estate appraiser, a member of the Order of Certified Appraisers of Quebec (OEAQ). The appraiser must adhere to strict appraisal standards and provide a detailed report that reflects an impartial estimate of the property’s value.
What Is the Cost of an Appraisal?
The cost varies depending on the complexity of the appraisal and the type of property. For a residential home, it is usually between $300 and $700, but for commercial or complex properties, the cost may be higher.
The real estate appraisal report is generally valid for a limited period, typically 3 to 6 months, depending on market conditions.
Certain special cases can influence costs or the appraisal process, including:
- Unusual properties: Unique or rare properties may require more complex and expensive appraisals due to the lack of comparables.
- Construction projects: For construction projects, the appraisal is often based on plans, specifications, and projections.
What Is the Purpose of Real Estate Financing Appraisals?
This type of appraisal is crucial to determine the mortgage loan amount. Generally, financial institutions lend a percentage of the appraised property value (e.g., 80%), referred to as the financing value. If the appraisal is lower than the negotiated purchase price, the buyer may need to adjust their financing or provide a larger down payment.
What Is the Impact on the Buyer and the Seller?
For buyers, an appraisal higher than the purchase price can be advantageous as it confirms they are paying a fair price, whereas a lower appraisal may create mortgage financing challenges. For sellers, a lower appraisal may affect their ability to sell at the desired price.
How Does the Real Estate Appraisal Process Work?
Real estate financing appraisal involves several steps:
- Property inspection: The appraiser visits the property to analyze its condition, age, dimensions, materials used, and other physical features.
- Market analysis: The appraiser then studies recent transactions of comparable properties in the same geographical area.
- Appraisal report: The appraiser provides a detailed report that includes a property description, appraisal methods used (comparison with recent sales, cost method, income method for rental properties), and the final estimated market value.
Different Appraisal Methods
The real estate appraisal expert generally uses three main methods to determine a property’s value:
- Comparison method: Compares the property to similar properties recently sold in the same area.
- Cost method: Calculates the value based on the reconstruction or replacement cost of the property, minus depreciation.
- Income method: Primarily used for income properties, evaluates the property’s value based on the revenue generated (e.g., rent).
Differences Between Municipal and Financing Appraisals
It is important to distinguish municipal appraisal from real estate financing appraisal. Municipal appraisal is used to determine the basis for property tax and may not reflect the current market value, as it is often updated every three years. Financing appraisal, on the other hand, is specifically intended to reflect the property’s value at the time of the loan application.
Real Estate Appraisal: An Essential Process
As you can see, real estate financing appraisal is a crucial element in real estate transactions. It protects financial institutions by ensuring that the loan amount reflects the property’s actual value and assures buyers that they are paying a fair price for their purchase.
Would you like to plan your purchase projects financially? Contact our accounting firm to speak with one of our advisors!
