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Fair Market Value
Ontario Assoc. of the Appraisal Institute of Canada
REM Article for April Issue
Fair Market Value
Estimating the value of a house, farm or office building can be a
challenge. The vendor wants more, the buyer wants less and,
sometimes, the vendor even wants less.
How do you determine fair market value? The answer is sometimes
simple and sometimes complex, depending on the property, the
neighbourhood and the economy.
One sure fact - once established, fair market value is fair market value
on the day the property was appraised-no matter what the reason.
Seems straightforward.
Surprisingly, not all individuals in the real estate business agree on this
point.
These comments were recently overheard. An instructor for OREA: "A
mortgage appraisal is different from others." A real estate broker with
over 15 years experience: "Give me a true appraisal, not like what you
do for the bank." A builder: "What factor do you use to calculate a
value?"
There are several elements that are analyzed in estimating the fair
market value of a property but they all relate to the property itself, the
surrounding area and the economy in that particular market. Whether it
is for financing, marital settlement, tax assessment, litigation or
inheritance, the intended use for an independent appraisal report does
not impact the fair market value of a property. A sale price, however,
can be negotiated based on these types of items.
Each property is evaluated for its own attributes relative to the market
on a given day by applying the established approaches to value. There
is no single factor that can be applied. The primary elements that are
used to arrive at a value are time, location and lot. The appraiser
conducts extensive research and fieldwork to undertake the necessary
analysis that will produce the unbiased report for a client.
It would be unethical for an appraiser to skew their evaluation to the
their client''s agenda. Clients are paying for a reliable, independent, 3rd
party opinion, and that is exactly what they should receive.
What exactly is fair market value? The Appraisal Institute of Canada
(AIC) defines it like this. The most probable price which a property
should bring in a competitive and open market under all conditions
requisite to a fair sale, the buyer and seller, each acting prudently,
knowledgeably and assuming the price is not affected by undue
stimulus. . .The definition goes into more detail, but you get the picture.
There are 3 generally accepted approaches used by accredited
members of the AIC to estimate the value of a property.
· Income
· Cost
· Direct Comparison
It is incumbent on the appraiser to select the approach or approaches
they are going to use to assess the property in order to properly
complete the assignment. Certain clients expect at least 2 and
sometimes all 3 approaches outlined in the report. When an appraisal
is done for financing for residential properties, the cost approach must
be included. The only exceptions are condominiums, townhouses and
apartments.
Appraising is one of those areas where everyone has an opinion -
some more educated than others. But when you take a closer look and
see the level of detail and the breadth of knowledge that is required, it''s
a real eye-opener. An appraiser''s ability to take vast quantities of data,
weave it into understandable information and arrive at a single,
supportable number takes education, experience, time and expertise.
The Ontario Association of the Appraisal Institute of Canada.
www.oaaic.on.ca. 416-695-9333.
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