How to Read a Real Estate Appraisal Report, Terms You Should Know

If you have ever opened a real estate appraisal report and wondered what terms like “effective date,” “highest and best use,” “market value,” “comparable sale,” or “extraordinary assumption” actually mean, you are not alone.

Professional appraisal reports contain terminology that appraisers use every day but that homeowners, buyers, lawyers, mortgage brokers and executors may not encounter very often.

At Cade Appraisals, we believe an appraisal should not just provide an opinion of value. The reader should also be able to understand what the report means and how the appraiser reached their conclusion.

Below, we explain some of the most common real estate appraisal terms in plain language.

Market Value

This is probably the most important term in an appraisal.

In simplified terms, market value represents the most probable price a property should sell for as of a specified date, assuming reasonable market exposure and knowledgeable, prudent parties who are acting in their own interests and are not under undue pressure.

It is important to understand that market value is not necessarily:

• The property's asking price

• The amount the owner hopes to receive

• The municipal assessed value

• The amount spent renovating the property

• The highest offer someone might theoretically make

A professional appraiser develops an independent opinion of value after analyzing the property and relevant market evidence.

The formal definition used in Canadian appraisal practice is considerably more detailed.

Effective Date

The effective date is the date the appraisal value applies to.

This can be different from both the date the property was inspected and the date the appraisal report was completed. CUSPAP specifically recognizes this distinction.

For example, a property might be inspected on August 15 and the appraisal report completed on August 18, while the client needs to know what the property was worth on December 31 of the previous year.

In that situation, the December 31 date would be the effective date of the valuation.

This becomes especially important for estate, tax, matrimonial and litigation assignments.

Current, Retrospective and Prospective Value

A current appraisal estimates value at or around the present time.

A retrospective appraisal looks backward and provides an opinion of value as of a date in the past.

For example:

“What was this property worth on the date my parent passed away?”

“What was the matrimonial home worth on the date of separation?”

“What was this investment property worth when its use changed?”

A prospective appraisal has an effective date in the future and involves a forecasted value opinion based on information and market expectations available when the appraisal is prepared. CUSPAP distinguishes all three types of value opinions.

Comparable Sales or “Comps”

Comparable sales are properties that have sold and are considered relevant to the valuation of the subject property.

You may hear real estate professionals simply call them “comps.”

A common misconception is that the appraiser should use the three geographically closest sales. That is not necessarily the case.

The objective is to identify sales that provide meaningful evidence about how the market values the subject property. Depending on the property, an appraiser may consider factors such as location, property type, lot characteristics, building size, age, condition, renovations, basement finish, garage, amenities and other relevant characteristics.

This is one reason two houses on the same street can have substantially different values.

Adjustments

If you see positive and negative numbers beside comparable properties in an appraisal report, these are typically adjustments.

Adjustments recognize relevant differences between the subject property and a comparable sale.

Suppose a comparable property has a feature that market evidence indicates buyers value more highly than the corresponding feature of the subject property. The appraiser may make an adjustment to account for that difference.

The important point is that an appraisal is not simply an average of nearby sale prices.

The appraiser analyzes the differences between properties and considers how those differences are reflected in the marketplace.

Direct Comparison Approach

The Direct Comparison Approach is one of the primary methods used to value real estate.

The appraiser analyzes sales of comparable properties and considers relevant differences between those properties and the subject.

For many owner-occupied residential properties, this approach can provide particularly meaningful evidence because it reflects actual transactions involving buyers and sellers in the market.

Cost Approach

The Cost Approach considers the relationship between the value of the land and the cost of constructing the improvements, with appropriate consideration for depreciation and other factors.

A simplified way of thinking about it is:

Land Value + Depreciated Value of Improvements = Indicated Property Value

The applicability and weight given to the Cost Approach depend on the property and the purpose of the appraisal.

Income Approach

The Income Approach is particularly relevant when purchasers typically acquire a property for its income-producing potential.

This may include properties such as:

• Apartment buildings

• Rental properties

• Commercial buildings

• Industrial properties

• Mixed-use properties

• Certain investment properties

The appraiser analyzes the property's income and expenses and applies appropriate valuation techniques to estimate value.

Reconciliation

An appraisal may contain more than one approach to value.

Reconciliation is the appraiser's process of considering the quality, relevance and reliability of the available valuation evidence before arriving at a final opinion.

It does not necessarily mean simply averaging several indicated values.

Highest and Best Use

This term sounds complicated, but the underlying concept is important.

CUSPAP defines highest and best use as the reasonably probable use of real property that is physically possible, legally permissible, financially feasible and maximally productive, resulting in the highest value.

For a typical home in an established residential neighbourhood, its existing residential use may be its highest and best use.

However, the analysis can become much more important when dealing with development land, commercial properties, redevelopment sites, larger parcels or properties with potential alternative uses.

“As Is” Value

An “as is” valuation generally considers the property in its actual condition as of the effective date, subject to the assumptions and conditions contained in the appraisal report.

This can become particularly important with properties that are under construction, substantially renovated, damaged or incomplete.

“As If Complete” Value

An appraisal may also be requested on the assumption that proposed construction or renovations are complete.

For example, a lender financing construction may want to know what a proposed house is expected to be worth assuming the specified improvements exist.

CUSPAP addresses the use of hypothetical conditions and extraordinary assumptions when an appraiser analyzes circumstances that do not actually exist as of the effective date.

Importantly, an “as if complete” appraisal is not automatically a prospective appraisal. The distinction depends on the effective date and how the assignment is structured. AIC has specifically discussed this distinction.

Extraordinary Assumption

Despite the dramatic name, an extraordinary assumption is an established appraisal concept.

CUSPAP defines it as an assignment-specific assumption that could materially change the appraiser's opinions or conclusions if it were not assumed to be true.

For example, a retrospective appraisal may require the appraiser to rely on information about what condition a property was in several years earlier.

The assumption needs to be clearly disclosed because, if the information proves incorrect, the value conclusion could potentially change.

Hypothetical Condition

A hypothetical condition is different because the appraiser knows the assumed condition is not actually true as of the effective date but analyzes the property as though it were true for a reasonable purpose.

A common example involves proposed construction.

The building may not yet exist, but the assignment could require the appraiser to analyze the property as though the proposed improvements were complete.

CUSPAP requires the report to make clear that the hypothetical condition does not actually exist as of the effective date.

Scope of Work

The scope of work explains what the appraiser did to complete the assignment.

CUSPAP describes it as the amount and type of information researched and the analysis applied to the assignment.

Depending on the assignment, this can involve property inspection, market research, comparable-sale research and verification, analysis of property characteristics and application of appropriate valuation methodologies.

The appropriate scope of work can vary considerably between a straightforward residential mortgage appraisal and a complex commercial, litigation or retrospective assignment.

Intended Use

The intended use explains why the appraisal was prepared.

Examples could include:

• Mortgage financing or refinancing

• Estate or probate purposes

• Matrimonial or divorce matters

• Capital gains or tax planning

• Litigation

• Private sale

• Estate planning

• Property acquisition or disposition

• Internal decision-making

Under CUSPAP, the authorized use or purpose of the assignment is an important component of the appraisal report.

Authorized Client and Authorized User

An appraisal report is prepared for specific parties and a specific purpose.

Receiving a copy of an appraisal does not necessarily mean another person or organization is authorized to rely upon it for an unrelated purpose.

This is particularly important with appraisal reports prepared for lenders, lawyers, estates and litigation.

Exposure Time vs. Marketing Time

These two terms are easy to confuse.

Exposure time looks backward. It estimates how long the property would have needed to be exposed to the market before the hypothetical sale occurring at the appraised market value.

Marketing time looks forward. It considers how long the property might take to sell after the effective date at the concluded market value.

CUSPAP specifically distinguishes exposure time as backward-looking and marketing time as forward-looking.

Chattels vs. Fixtures

This distinction can matter when determining exactly what real estate is being valued.

A fixture is generally something that has become attached to and forms part of the real property, while a chattel is personal property.

Depending on the assignment and property type, an appraiser may need to distinguish the value of the real estate from personal property, equipment, furniture or other assets.

This can be especially important in commercial appraisal assignments.

Why Appraisal Terminology Matters

An appraisal report is much more than a number on the final page.

The effective date, intended use, scope of work, property rights, assumptions, market evidence and valuation methodology all provide important context for understanding the appraiser's opinion.

The Appraisal Institute of Canada requires appraisal reports to identify matters including the authorized client and user, authorized use, purpose, scope of work, effective date and relevant assumptions and limiting conditions.

Understanding these terms can help homeowners, lawyers, lenders, executors, accountants and other users better understand what an appraisal actually says and, just as importantly, what it does not say.

Need a Real Estate Appraisal in Niagara?

Cade Appraisals provides residential and commercial real estate appraisal services throughout Niagara Falls, St. Catharines, Welland, Thorold, Fort Erie, Niagara-on-the-Lake, Pelham, Port Colborne, Lincoln, Grimsby and surrounding areas.

Our appraisal services include residential and commercial valuations, mortgage financing and refinancing, estate and probate appraisals, retrospective valuations, matrimonial and divorce appraisals, capital gains valuations, litigation support, private-sale appraisals, market rent studies and other specialized assignments.

If you have received an appraisal report and are unsure what some of the terminology means, ask your appraiser for clarification. A well-prepared appraisal should communicate not only the value conclusion, but also the basis and context for that conclusion.