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What is the house really worth?

Appraisals, tax assessments, market value.. there are a lot of words thrown around that can confuse buyers and home owners as the value of their home or more importantly - what is the value in whose eyes? The tax assessor, the bank appraiser, your ex spouse/their lawyer, the seller and the buyer may all have wildly different views on the monetary value of the property depending on what you are doing in that moment to determine the valuation. Let's delve into the different types of assessments of value and break down why and how the valuation may be so different from one person to the next.

Home Inspections Bringing this one up first as this one often gets confused with an appraisal. A home inspection has nothing to do with the price or value of a home, this is where a professional inspector will come and go through the house to prepare a report identifying any issues, items to repair and to note any major concerns so that you can feel comfortable that the home you are purchasing is in good condition or that you are prepared for any work required. Your lender typically does not require a copy of the home inspection report, that is just for you, but every now and then a lender will ask for a copy to ensure the house is in good shape before the lend to you on it. This typically comes up on older properties where there is a risk of outdated electrical, plumbing or foundation issues but in a few hundred mortgages I have been asked for the inspection report only twice, so certainly not common for the lender to require it.

Property tax assessment value

The first indicator of the rough value of a property is a tax assessment value, however, depending on the property (particularly if it is rural), the province, city or county it is in and the changing market landscape, the valuation on the tax assessment can be wildly incorrect.

Assessments are calculated using a mass appraisal by analyzing a range of sale prices of groups of similar properties as of a given date. Because the assessment is done on mass for all properties based on the same data at a given point in time, the assessments can be skewed and generic or outdated.

In Alberta the values are based on the value of a property a full year before the current tax year. So for example, in Alberta, property assessed values for spring 2024 tax bills that come out in June are based on the comparable average and most probable sale prices on July 1, 2023.

For this reason, in rising price environments, you might find an assessed value is much lower than an actual list price. It does not mean the house is not worth the list price, it could mean that the property has appreciated and values have gone up in the year since the assessment. It could also mean that the property has features that value it higher than the others in the area. For example, tax assessments do not take into consideration whether the house is in better condition than others, updated and freshly renovated, has a better layout, comes with a hot tub or well maintained yard or other features that make it more desirable to the market.

There are some types of properties that fall under a different category of property assessment for valuation, most commonly we see this in farmland where you will have 1 value for the dwelling on the land and another value for the land itself which is often dramatically lower than the market value of the land and property in actuality.

Farm land is assessed on it's productive value for producing agricultural income (growing crops, raising livestock) and this productive value is affected by soil conditions (location), presence of sloughs or topography, whether it is cultivated and rock cleared or pasture land or forested, does it have oil and gas wells, pipelines, power lines or other facilities either income generating (like an oil pump jack) or not. Just because the tax assessor might value the land lower due to rocky conditions or being on top of the hill with no water and more exposure to wind which affects productivity, that does not mean that the view of the mountains only half hour to the city does not carry a hefty value on the market. A farmer looking for productive farm land might not value the property the same way as a young family looking to build their dream home with an amazing view.

Appraisals of all kinds

This is where an appraisal comes into the picture. And there are a few different types and ways that an appraisal helps determine the value of a property so let's break it down.

Realtor CMA (Comparative Market Analysis) This is what happens when your Realtor pulls comparable sales of similar properties and analyses the sale prices to find a reasonable price for the house based on the features that make this property worth more or less than the others. This is not an appraisal from the lenders perspective, but a good Realtor will have the experience to determine the appropriate price range for a property based on the history of comparable sales.

A Realtor CMA is used solely for the purposes of the buyer and seller to determine if the property is being purchased for a reasonable price compared to other listings on the market.

Independent Appraisal

Appraisers are licensed individuals who have gone through a minimum of 3 years post secondary education to obtain their license to appraise homes and you can hire one whenever you want for an appraisal on your property, however, an independently ordered appraisal is usually useless for the purposes of a mortgage (which I will get into next). Typically an independent appraisal ordered by a homeowner would be useful only to the home owner to get an idea of value, or perhaps to be used in a divorce or buy out scenario. The appraiser will visit the home, take photos of the condition of the house and pull comparable sales in the last few months in the area and determine the approx. value of the property based on quite a few factors.

Lending Appraisal

This is the one most commonly requested and also can be the most frustrating so we will break this one down here in a bit more detail. This is where the lender you are working with for your financing is requesting an appraisal on the property.

Just like an independently ordered appraisal, the appraiser most commonly visits the home and takes pictures of every room in the house and does up their report. Sometimes a desktop appraisal is requested which means the appraiser does not need to personally visit the property. An appraisal is ordered for the benefit of the lender only and the report is directed to the lender and cannot be used for any other purposes. This can be frustrating when clients typically are the ones that pay for the report, but are not actually given a copy of it. The reports are also not often transferable for different lenders so if a client switches lenders and needs an appraisal for the next lender, they often need to pay to order a new one or pay for the appraiser to redo the report for the next lender which is why choosing the right lender up front is integral for some property types. Depending on what you are buying, a small difference in interest rate might not matter if the higher rate lender will value the property higher than a lower interest rate lender for example so it is important to keep in mind that the lender with the lowest rate is not always the most ideal for your situation.

There are a great many factors that come into play when a lender is requesting an appraisal on a property which highlights one of the reasons that working with a mortgage broker can be advantageous for clients, a broker can determine the best lender for the property when they know the criteria the lender will consider in the appraisal, particularly with rural properties.

A few examples:

  • Some lenders will only appraise small parcels of land (maximum valuation of 5 - 10 acres) so while the purchase price might be based on the property having 25 acres, if the lender only lends based on 5 acres there could be a substantial difference between the price and the appraisal value the lender is willing to consider for the property.

  • Some lenders will not value additional outbuildings like shops, barns, arenas etc. Many lenders will give appraisal value to the house and garage only, so if there are quite a number of outbuildings you may run into a risk of the property under appraising despite the fact that the buildings carry a great amount of value. For example, a second powered and heated shop with large bays and a hoist for working on trucks could be worth an extra 100k in the purchase price, but be value-less to the wrong lender.

  • Some lenders will not give value to basement suites that are not fully legal which could show a lower value compared to the price if they are appraising the property as one whole house rather than a house with an income generating suite in the basement which would drive up the price and value to a potential buyer.

  • If the buyer has less than 20% down payment, the mortgage needs to be insured by one of the 3 main mortgage default insurers in Canada, these insurers also have restrictions on what they can value and what they cannot in an appraisal, so even if the client goes to the lender that can take appraisal value for all of the land, the insurer cannot which can also lead to under valued properties in an appraisal.

  • Some lenders allow your broker to hire their own appraiser which gives us the ability to hire a well respected and knowledgeable appraiser that we have worked with in the past and knows the area the property is in. Other lenders require the appraiser to be hired blindly through a third party service and we have no control who the job is assigned to. This can sometimes cause issues when an appraiser that is not familiar with the location comes out to appraise without knowing the area or property types as well as another for example.

  • Some lenders/insurers will take a % of the appraisal value and reduce their internal value support for the property to account for market fluctuations and risk. I have had a few times where an insurer was only willing to 'support a value' of X when the property had actually appraised for higher. This is most typically common in times of slumping sales activity and valuation drops where the lender or insurer is looking at value declines and basing their value on what the property might be worth in a few months or a year if value drops continued on the current trajectory.

  • Is the property unique without much to compare it to? Or is it in an area without many recent sales? Is it the most expensive home in the town it is in and therefore no comparable sales exist to support the price? The property itself might simply be difficult to appraise.

In short, there are many factors that could cause the property to under appraise based on the lending rules the appraiser is given. One appraiser might appraise the property at one value for lender A and then a totally different value for lender B based on the different valuation criteria for each lender. As well, just like everyone else in any profession, not all appraisers are created equal. You might have one appraiser give 1 value and another appraiser come up with a different valuation. It is after all, a highly educated opinion.

And worth remembering that the appraisal value does not necessarily equate to the actual price. Appraisal values are based using comparable sales in the months preceding the report itself, but does not take into consideration current active listings that have not yet sold or that are pending and waiting on closing - sales are reported at the time of closing on the deal not when the purchase contract is drafted up. In times when prices are increasing quickly, the recent sales might be lower than today's value simply because things are still a few months behind. And vice versa, in times when values are dropping the value of the appraisal might actually come in higher than the current price.

What happens when a property under appraises?

If you are buying and the property under appraises you would make up the difference with additional down payment.

If that is not an option for you then you could try to negotiate with the sellers for a lower price (keeping in mind the property might truly be worth the agreed price just because the appraisal value isn't there doesn't mean it isn't worth it).

You could try another lender (depending on the property another lender might give a different valuation).

You can hire another appraiser (perhaps a different appraiser will come up with a different value? but that can be expensive to hire another report that could still come in low).

If none of these approaches works, you might need to let that property pass you by and keep searching for the right one.

So what IS the house worth?

Well much like anything, beauty is in the eye of the beholder. At the end of the day, the property is worth what someone is willing to pay for it.

Just because a CMA from the Realtor and an appraiser say the house is worth one price, if no one is willing to pay that price then it really isn't worth it and expectations might need to be adjusted if you are the homeowner.

And if you are the buyer, you might be so in love with the property that you are willing to pay more than the appraisal value just to ensure it is yours.

But usually, the stars align, properties appraise on price and everyone lives happily ever after.

As always, if you have any questions on this or any other mortgage topic, feel free to reach out to me at or 780-720-4034

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