Home Property Valuation: Why is it important in today’s economy?

    Property Valuation: Why is it important in today’s economy?

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    Why property valuation is important

    Try to imagine an economy where no qualified and designated appraisers exist. Lenders, mortgage insurers and mortgage brokers would not be able to verify the value of a property during a mortgage underwriting process. Governments would be unable to value their public assets and regulators would have no policies to mitigate risk and guide real estate transactions. Unqualified “appraisers” with no education, professional standards or ethics might offer their amateur services, resulting in inaccurate property values. Qualified appraisers from other countries might provide real estate valuation services without knowing the intricacies of the local market. The result? A very unstable real estate market and economy!
    As the 2008 – 09 financial crisis so clearly demonstrated, real estate markets – when not appropriately regulated and managed – can contribute to the instability of a nation’s economy. One of the core elements of a healthy and balanced real estate market is a systemic approach and commitment to reliable property valuations. Unbiased and independent real estate appraisals play a vital role in assisting individuals, businesses and governments to make informed decisions during real property transactions. They help by:

    Mitigating Risk
    On-site appraisals are the most effective way to mitigate lending and property investment risk. A visual on-site appraisal and on-site collection of data conducted by a third-party qualified appraiser will determine the occupancy, the condition of the property, the neighborhood characteristics, and ultimately, the existence of the property. This due diligence ensures that the decision-maker has a reliable appraisal report with a well-supported opinion of value.

    Detecting and Preventing Fraud
    Understanding the dynamics of the transactions (e.g., list prices, sales prices; number of days on the market; who the buyers and the sellers are; “quick flips” and properties that have exchanged within a short period of time, etc.) can provide valuable information on market trends. It also assists in fraud detection and/or prevention – an increasingly significant and costly challenge for the lending industry.

    Providing Trusted Opinions of Value
    An independent and expert opinion based on comprehensive valuation methodologies go much deeper than a review of comparable properties that have sold in the same neighbourhood or an automated valuation model based on questionable data. An unbiased professional opinion adds a layer of objectivity to a real estate decision. This impartiality is critical – especially if emotions, time and money might cloud your judgement.

    Strong valuation fundamentals helped Canada’s economy remain intact during the global financial crisis at a time when many of the worlds’ leading economies faltered. Members of the Appraisal Institute of Canada helped to establish those fundamentals by contributing their real estate expertise and knowledge to the lending industry and providing sound valuation advice to clients and key stakeholders.
    Overall, the role of a professional designated appraiser is an important one. Although it may go unnoticed and happen behind the scene between lenders, insurers, mortgage brokers or appraisal management companies, it is a critical component of the success of the real estate industry. You may just have to look at emerging economies with no valuation professionals or association to realize it!

    3 COMMENTS

    1. The real estate agent typically provides a product called a competitive market analysis or CMA. The purpose of the CMA is to provide a listing price for a given property as of a given date. They usually do not charge a fee for this service. Their goal is to obtain a listing on your house and eventually a real estate commission. The real estate agent typically does not have formal training in the field of appraising. If the agent is a Realtor, they must follow the Realtor Code of Ethics. Their code is not as comprehensive as the Uniform Standards of Professional Appraisal Practice unless the agent calls their product an appraisal or holds himself or herself out to be an appraiser. If the agent calls their product a real estate appraisal or themselves an appraiser, they need to follow the state law and Uniform Standards of Professional Appraisal Practice. That’s not to say agents do not have knowledge of value as most have a great deal of real-life knowledge of a given market area.

    2. The appraisal of properties unfortunately does not take into consideration, the fact that low interest and minimum down payments have had a large effect on so called value. The equity portion of the value has not been raised, only the financing. Appraiser’s should look more to the financing of an individual transaction and adjust accordingly as to real value.

    3. This is an important article.
      Mr. Lancastle raises some issues that need to be discussed by the AIC membership and other industry participants.

      1. ‘Unqualified “appraisers” with no education, professional standards or ethics, resulting in
      inaccurate property values.’
      Does anyone know of an any appraiser that has no education? There are many appraisers that are well educated, conduct their services to very high professional standards, and have impeccable ethics.
      Often the valuation of many real estate assets and portfolios are conducted by teams or professionals which may include real estate appraisers, engineers, accountants, economists, financial analysts, etc.

      2. “As the 2008 – 09 financial crisis so clearly demonstrated, real estate markets – when
      not appropriately regulated and managed – can contribute to the instability of a
      nation’s economy.”
      This statement appears to imply that the 2008 – 09 financial crisis was significantly attributable to inappropriately regulated real estate markets which included, to some extent, real estate appraisers. The resulting inherent financial crisis had little to do with actual “real estate appraisals”, but with the bundling, packaging and reselling of property assets. While this may have been initiated in the USA, it certainly became an international problem that had little to do with actual real estate appraisals.

      The “valuation” of real estate assets is changing as we move into the 21st Century. To an increasing degree the old “appraisal” approaches may no longer be adequate to address many of today’s real estate asset valuation issues, and they are certainly inadequate to deal with such property asset valuations in the years ahead.

      This subject needs serious discussion, and this new AIC Exchange forum could provide a good vehicle for this purpose. We need to start the conversation before it is too late.

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