Updated: Jan 26
There is a value determination on every single mortgage transaction always
TL;DR: As the title suggests, an appraisal is a determination of the value of a property. An appraisal can be completed for many purposes, or "intended uses" of the report. The intended use of an appraisal report completed as part of the mortgage transaction will be "mortgage lending purposes" and the "user" of the report, regardless of who is paying for the appraisal, is always the lender or default insurer.
What is an appraisal?
An appraisal is a report prepared by a qualified and licensed residential real estate appraiser, which determines the current fair market value for a given property. The report will also evaluate likely exposure times (how long it would take to sell the property), a commentary about the quality of the location (backs onto green space; next to schools; busy road, etc.) and will include photos of the interior and exterior.
Most often, the value is determined using the Direct Comparison Approach. Three or more comparable properties sold in the past (nearby, similar in size, as recent of sale dates as possible, etc.) will be outlined in the report, and the subject property (the one being appraised) will be compared against the others. Adjustments will be made for level of finishing, location quality, square footage, property features (walkout basement, 3-car garage, and so on).
The end result is a report containing everything you would want to know if you were figuring out if you would lend someone hundreds of thousands of dollars, and your fallback if they stop paying you is to foreclose on the property.
When is it required?
In a purchase transaction
In a high-ratio purchase transaction (less than 20% down payment) an appraisal is considered rare. When a transaction is default insured, the insurer (CMHC most of the time) will provide the lender with a confirmation of the value, and suitability of the property. CMHC in particular insures so many transactions and has so much housing and price data, they can make a pretty good determination of value with the address, square footage, and postal code. Only if the purchase price is way out of their acceptable range would an appraisal be required.
In a conventional purchase (20% down or more) an appraisal is considered routine, but is not always required. Since the transaction is not default insured (it might actually still be but let's pretend it isn't for the sake of this article), nobody has yet provided the confirmation of value to the lender, so they will require you to pay for an appraisal so they can get eyes on it, via the appraiser. Some lenders have their own automated valuation model, or they use someone else's (like CMHC's emili database) and charge a small fee of $0 to $150. This gives the lender what they want, and saves the borrower a few hundred dollars at the same time.
In a purchase + improvements transaction, an appraisal requirement is hit and miss. We haven't collected the stats on it, but depending on the value of the proposed renovations, and whether or not the file is high-ratio or conventional, an appraisal may be needed. But sometimes it isn't!
Who pays for the appraisal?
It depends on who requires it.
If the default insurer wants it, they pay for it, they will order it, and they will keep the report to themselves. If they are ok with what they get, they'll approve it, and defer back to the lender as to whether the lender wants to proceed or not. At that point the lender makes the call as to whether they will approve the mortgage application.
If the lender wants it, you pay for it. We are required to order it directly from the appraiser, and the report is addressed to the lender. The report is transmitted directly from the appraiser to the lender. In this case, you will receive a copy of the report.
If an appraisal is required for your transaction and you are required to pay for it, the cost is sometimes eligible to be covered. A variety of factors affects whether this will be the case for you or not.
How much does an appraisal cost?
The cost ranges from $250 for smaller properties in major centres, to $500 or more for larger homes, larger properties, or locations that are further from where the nearest appraisal company is located.