What is Market Value

An appraisal is an estimate of value, usually in terms of dollars. There are different types of value that can be estimated, such as Insurance Value, Replacement Cost Value, and Rental Value, among others. The type of value most often required by mortgage lenders, buyers, and sellers is Market Value.

The Appraisal Institute of Canada has a very specific definition of Market Value. In layman's terms, it is the price an informed buyer and informed seller would agree upon in an open market with no unusual time, personal, or economic pressure on either of them.

How Do You Value My Residential Property?

An Appraiser can value your home using three methods.

Cost Approach
This approach assumes that a buyer would not want to pay any more for the usefulness of your home than it would cost to build. The cost to build your home is calculated, then depreciated according to its age, wear, perhaps location, or other important factors, and then this value is added to the value of your lot, to arrive at a market value.

Income Approach
This approach is most useful in determining market value of duplexes, triplexes and other rental units. It can be used for single family dwellings if there are a number of recent sales of homes that have been rented.

Comparative Sales Approach
This looks at one or more recent sales of properties that are similar to your home in terms of size, age, condition, location, utility, and value in use. These are called Comparables. The Comparables might not look the same, but they offer the same usefulness and prestige. The sales prices of these recent sales are then adjusted up proportionally for every aspect of your home that is superior (e.g. more bedrooms, better flooring) or down, for every aspect of your home that is inferior (e.g. fewer bathrooms, no garage.) The adjusted value that results is the price a buyer should be willing to pay for your home if it were on the market in competition with the Comparables; that is, the Market Value. If the sales prices have risen or fallen since the sale of the Comparables, a time adjustment is added or subtracted as well. This method is often the most reliable in active markets, and is the approach most often seen on Residential Appraisal Reports.

The Appraiser must use at least one of the above methods to value a property, and is also required to inform the client if any of the three methods is omitted, and why it is omitted.

How do renovations affect value?

Renovations are vital if you want to maintain your home's value. But don't expect a dollar for dollar return on your investment. Think of renovations as helping to reduce loss due to depreciation rather than adding value.