It’s likely you have purchased or will purchase a home within your lifetime. It’s a huge investment, and you end up spending a lot of time evaluating the possibilities. Should you buy this house? What would increase the value of your current property? What should you keep in mind when renovating?
We turned to Keith Lancastle, CEO of the Appraisal Institute of Canada for expert tips! Here are his answers.
What is a home appraisal, how is it done?
A home appraisal is an independent and unbiased opinion of the value of your property, completed by a qualified real estate appraiser.
One of the key methods in valuing a residential property involves comparing properties that have recently sold within the neighbouring area that offer similar characteristics to the property being valued. Since the objective of the appraisal is to estimate the price the subject property would most likely sell for if exposed to the marketplace, recent sales of similar properties are used for comparison and as benchmarks. Comparable sales represent what other informed buyers in the marketplace are willing to pay for similar features, location and amenities.
Where recent sales in the immediate area may be lacking, the appraiser can go back in time to analyze sales that transacted and expand the search to surrounding neighbourhoods offering similar characteristics as the subject area.
How do you appraise different types of buildings?
There are several methodologies qualified appraisers will apply when determining an opinion of value, and they are largely driven by the scope of the assignment and the property type:
- Direct Comparison Approach – This methodology is used when the appraiser develops an opinion of value by analyzing completed sales, listings or pending sales of properties that are similar to the subject property. Estimates of market rent, expenses, land value, cost, depreciation and other value parameters may be derived using a comparative technique.
- Cost Approach – This methodology considers the land and building components separately, and reaches a value conclusion by adding these estimates together to form an opinion of value. Like the Direct Comparison Approach, the Cost Approach is based on a comparison of the cost to replace the subject (cost new) or the cost to reproduce the subject (substitute property). The total cost estimate is adjusted by deducting the accrued depreciation (i.e., physical wear and tear, functional deficiencies and external influences) of the dwelling and the site improvements (e.g., garage, deck, pool, etc.). The Cost Approach is most reliable when a property is newer due to the lower depreciation.
- Income Approach – Income-producing properties are typically purchased as investments and the earning potential is an important element affecting the value. Through the Income Approach, the appraiser analyzes a property’s annual income and expenses to convert the net income into a present value. This methodology is typically not applied when valuing a residential property
What would you say are the top 5 improvements someone can do to a home to increase its value?
The top five improvements someone can do that may provide the highest return on your investment include:
- Kitchen – renovating or updating your kitchen with quality materials and workmanship consistent with the home and the area
- Bathroom – renovating or adding quality materials and workmanship consistent with the home and the area
- Repainting Interior / Exterior – painting in tones with wide-ranging market appeal
- Updating Décor – updating lighting and plumbing fixtures, counter tops, replacing worn flooring (vinyl or carpets) or refinishing hardwood floors
- Decluttering – removing all excess items to showcase your home
The top five renovations with the highest enjoyment value include:
- Basement Finishing
- Sun Rooms / Additions
- Decks / Fences
The top five renovations with longer-term value include:
- Replacing the roof
- Updating the heating and cooling systems
- Replacing windows and doors
- Updating the electrical (panel, wiring, sockets, fixtures)
- Repairing structural defects
In that same subject: what can decrease it?
The market value of the property is estimated as at a specific date, based on the market conditions and property conditions at that time. Changes in market conditions can affect the supply and demand for similar properties and the appeal of the subject property in the marketplace. Similarly, deferred maintenance on a property, outdated or poor quality finishes can have a negative effect on the property’s appeal and value.
When buying a home, what to look for in order to assess value?
Determining the market value of the property can be complex and takes a significant amount of research and knowledge about the neighbourhood, the overall market conditions, and the structural components of a home.
When buying a home, consider your life plans. Are you planning to live in the property for a few years or do you plan to stay for the long haul? Are you buying to rent or own? Depending on your plans, you’ll want to consider the property’s overall condition and assess the short- to medium- to long-term improvements you would need to make to determine if you’re looking for a fixer-upper, a turn-key or something somewhere in between where you can renovate and add your personal touches.
What to stay away from?
Buying a home is very personal and the choice and type of home you decide to purchase will depend on your life plans. A real estate appraiser can assist you in the purchase of a property by not only providing you with an estimate of market value but also by advising on key characteristics for your consideration and their contributory value to the property. An appraiser’s work is more than just providing a value; it’s about advising you in your real estate decisions.
Best tips from appraisers on anything related to home?
To ensure the long term value of your home:
- Choose improvements with long life expectancy. Roofing, energy-efficient heating and cooling systems, and windows can provide homeowners worry-free home improvements for as long as 10 to 15 years. But remember… regular maintenance is as important as the initial investment.
- Invest in modern updates in high-traffic areas. Update the core rooms of your home such as the kitchen and bathroom. This can be as simple as changing door knobs, resurfacing cabinets, or replacing fixtures and countertops.
- Don’t underestimate the value of inexpensive updates. A fresh coat of paint, modern lighting fixtures, light landscaping or gardening, or upgraded door handles can give your home an updated look and feel – and it doesn’t have to cost a lot of money!
- Consider energy-efficient renovations that have a high return relative to cost. Energy-efficient renovations are considered one of the highest paybacks relative to cost. Energy efficiency translates into reduced operating costs over time.
- Be careful about over-improvement. Consider your neighbourhood and the expectations of buyers in your area when planning your next renovation project. Investing in an expensive project may be an over-improvement for a home in particular market, and the investment may only be partially recognized by homebuyers.
- Think about your personal needs. How much you spend on improvements will depend on how long you plan to live in your home. If you’re thinking shorter-term, smaller and less expensive improvements may be your best bet to recover your investment.
- Be sure to get a building/renovation permit. Take the time to obtain the proper building permits from your municipality or appropriate authority. This is a good step to ensuring that the renovation work complies with the building codes.
- Hire a designer, architect, or contractor. Talk to a professional when you start planning your renovation project. They can help you draw up a plan, provide renovation advice, or assist in the construction. This will add to the quality of the renovation and go a long way in preventing cost overruns.
- Consider unique features with care. Unique designs or improvements that are uncommon for a particular market may impact the resalability of a home. This is where the expert advice of a real property appraiser can provide an objective perspective on the marketability of the property.