With the advent of new Office of the Superintendent of Financial Institutions (OSFI) regulations implemented in January 2018, the landscape of the federally regulated lending world has altered. A new minimum qualifying rate, also called a ‘stress test,’ is now required for uninsured mortgages, i.e., those mortgages where the borrower has 20% or more of the value of the property as a down-payment. The stress test is undertaken to ensure that a borrower will be able to continue to repay the mortgage if interest rates increase. The new qualifying rate is the five-year benchmark rate published by the Bank of Canada, or the contractual mortgage rate plus 2%, whichever is greater.
In theory, this regulation should prevent individuals from diving into the world of mortgage debt when they are not ready to meet the financial requirements. In reality, we are seeing individuals and financial institutions taking more creative routes toward mortgage qualification, often proposing that the future homeowner could have the ability to rent out a room – or multiple rooms – to help meet their mortgage payment obligations and/or pay down their debt more quickly.
What does that mean for appraisers? It means that AIC Members are receiving more requests from lenders for comparable market rent reports for a specific property, either as a stand-alone report or to accompany a full residential appraisal assignment for mortgage financing purposes.
The potential risk associated with this type of report
Members may be uncertain about the appropriate practice for completing these types of market rent assignments. This uncertainty is further compounded if they receive information and/or instructions from the person ordering the report that conflicts with Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) requirements.
The greatest risk to an AIC Member arises when he or she agrees to the request for a ‘one-pager’ market rent report or to ‘throw the market rent in as a one-liner’ in the market value report for a specific property (a full residential appraisal report). Members must remember that a market rent analysis must be performed in compliance with CUSPAP – therefore, a ‘one-pager’ would likely not comply with CUSPAP and could increase a Member’s risk of liability.
If a market rent value is being requested along with the market value of a property, it is wise to assume that the loan may be higher risk. A higher risk loan has a higher likelihood of default. A higher likelihood of default carries a higher risk of liability.
The ‘one-pager’ or ‘one-liner’ often lacks the safeguards of a thorough market analysis performed in compliance with CUSPAP, and therefore increases a Member’s risk and may make it more difficult to defend against a claim.
Writing a CUSPAP-compliant report with a market rent value
When faced with a market rent assignment, the first place to turn for guidance is to CUSPAP 2018 (https://www.aicanada.ca/wp-content/uploads/CUSPAP-2018-2.pdf).
Depending on what is being valued, a market rent assignment can fall under the Real Property Appraisal Standard or the Consulting Standard. The following is a general ‘rule-of-thumb:’
- If the assignment is for a specific, identifiable property, then the Real Property Appraisal Standard
- If the assignment is for a general property type, without identifying a specific subject property, then the Consulting Standard
In either situation, the report must contain sufficient information to comply with the Standard Rules associated with the assignment (client, intended use, intended user, scope, highest and best use, supporting data assumptions and limiting conditions, certification, etc.). A report can be in a form report format or a narrative format, as long as the report is CUSPAP-compliant.
A market rent value for a specific property
As mentioned previously, when a property is a specific, identified property, the report must comply with the Real Property Appraisal Standard (see 6.1.1). These types of assignments usually fall into two categories:
- A report providing both a market value and market rent value.
- If a market value and a market rent value on an identifiable property is requested and, if a form report is being used, then an AIC Full Residential Appraisal Form – 0118 should be completed and a Market Rent Addendum OR a qualitative narrative addendum should be included in order to comply with CUSPAP. The Market Rent Addendum provides a place to include a market analysis of rents for a subject property. The report will require a rental data set so that the market rent value conclusion is supported with the appropriate data and analysis.
- A report providing only a stand-alone market rent value.
This would include assignments where a client wants to know if the current rent of an identifiable property is at market levels.
- If a stand-alone Market Rent Report on an identifiable property is requested and a form report is being used, then all relevant sections of the AIC Full Residential Appraisal Form – 0118 should be completed and a Market Rent Addendum OR a qualitative narrative addendum should be included in order to comply with CUSPAP. For this type of assignment, comparable sales are not required, only comparable rents. A one-page Market Rent Addendum alone will not comply with the Real Property Appraisal Standard.
An example of a narrative report format is provided in Box 18.5.10 in the Practice Notes section of CUSPAP 2018. It can be modified to meet the required content for a Market Rent Report for an area, neighbourhood, property type, etc.
Data that can be used in a Market Rent Report
Market Rent Reports should provide whatever data is available to a Member. Data can include confirmed leases, current and expired rental listings, and web sites that feature listings of properties for rent. A report’s research and analysis will determine the validity of the data and its applicability to the assignment.
The source of the data should be noted in a report. Sources may include an appraiser’s own database, property managers, landlords, Kijiji, Craigslist, newspaper ads or billboards, a CMHC report, and/or a market research report. There is no requirement in the report for a specific number of comparable sales, rents, or sales with rents; rather, the requirement is to include a sufficient amount of reliable data to meet the reasonable appraiser test. If there is a current rental contract in place for the property, the actual rent the property is earning should be noted in the report.
As with any type of appraisal assignment, a report can only include the data and information that is available at the time the report is written. If details of the market data are not available, those fields in a form report are left blank and the lack of detailed data is explained in a form report’s narrative fields. Communication is always a key aspect of any assignment and is especially crucial where market data and/or details are sparse. Thoroughly explaining the lack of data and resulting analysis as well as the reasoning in the report ensures that the client understands the content of the report and the final value conclusion.
How market rent amounts can be presented
It is acceptable to provide ranges of rental rates. The estimated market rent can be a single point value, a range of values, or an indication of value, e.g., ‘not less than’ or ‘not greater than’ a specified amount.
For more information
Further examples are posted on the AIC website: https://www.aicanada.ca/forms-templates/0118-form-faq/
General information about, and downloadable PDF versions of, the 0118 AIC Report Forms can be found at: https://www.aicanada.ca/forms-templates/