Your investment property’s value is a critical number in determining your profits. Whether you’re investing in a property, looking to refinance your existing mortgage or selling your property, a home appraisal can dramatically change your profit margin. Let’s explore what a home appraisal is, how it works and what you need to know.

What is a home appraisal?

A home appraisal is an unbiased estimate of a real estate property’s fair market value. During purchase and sale transaction, the home appraisal determines whether the contract price is fair based on the home’s condition, location, features and other factors.

If the homeowner wants to refinance their home loan and lower their mortgage, lenders require an appraisal to make sure they don’t lend more money than the home is worth. Lenders don’t want a homeowner to borrow too much; if the homeowner defaults on the mortgage and goes into foreclosure, the lender will sell the home to regain their money. If they loaned for more than the house was worth, they won’t recoup their loss.

How appraisals work

An appraisal is usually ordered and is owned by the lending company because it affects the lender’s interests. However, the borrower usually pays for the appraisal. The fee is generally determined by a flat rate plus the complexity of the property and amount of time to complete the appraisal, typically $300-$400.

A qualified real estate appraiser will conduct the appraisal. Appraisers are certified through the Canadian National Association of Real Estate Appraisers or the Appraisal Institute of Canada. Each province may also have additional licensing requirements. The appraiser is an impartial third party and does not stand to benefit from the sale or refinance outcome.

The appraisal can last from 20 minutes to an hour. The appraiser will do a complete visual inspection of the interior and exterior, and with the homeowner’s consent take photographs. During that time, they’ll will look for a variety of factors that impact her valuation decision, such as:

•Square footage

•Number of bedrooms and bathrooms

•Amenities

•Systems like HVAC, plumbing

•Interior-exterior finishes

•The quality of any improvements

•Any deficiencies or required repairs

Other factors that impact the property valuation are the neighborhood and the sale price of nearby similar properties. The appraiser will use market sales data, public land records and public tax records to make his final decision.

Appraisers won’t give a valuation on site. After completing the home inspection, they will continue their research to make a final valuation judgment. Although the homeowner pays for the appraisal, the appraiser’s client is the lending company. The homeowner will receive a copy of the appraisal, but the appraiser answers to the bank first.

How the appraisal affects your profit potential

When you’re buying a property, the appraisal is part of the closing process. Hopefully the appraisal will be at or above the contract price, and you can proceed with buying the property as planned.

If the appraisal valuates the home at a lower price, your deal could be delayed or canceled. The bank won’t lend you more money than the house is worth. A lower valuation is a great bargaining tool to get the seller to lower the price. If the seller doesn’t trust the appraisal and won’t lower the price and you want to continue with the deal, you can approach the original appraiser with any new or additional information, or get a second opinion.

When looking to refinance your property, a low appraisal can prevent you from securing a better rate from the bank. Your appraisal needs to be at or above your previous valuation. Again, a second opinion or additional information can help you get a more desirable valuation. The final number may also influence your rental rates if you have tenants.

If you’re selling your investment property, the appraisal will impact how much you earn in closing. A low valuation means you’ll need to lower your selling price; no one wants to pay more for a property than necessary.

If the housing market was hit hard in your area and nearby homes are low-priced, you can make the case that your home is in better condition or has more amenities than similar homes to try to get a higher valuation.

Know your worth

A real estate appraisal seems like just another part of the homeowner’s journey, but when you’re investing in real estate it’s critical to determining how profitable you’ll be. An appraisal ultimately insures you’re paying the fairest price possible, and may even tell you your investment property is worth more than you realized.