One of the biggest challenges faced by home buyers and home owners is how to determine the value of a home – whether your own or the one you want to buy. When you are a home buyer you usually rely on the price listed, you refer to your realtor for guidance and you may talk to family or friends who have bought in the same area. When you are a home owner looking to sell or refinance your home you may do the same thing to determine the value of a home. But in a shifting market (like the one we are seeing now) it can be difficult to determine the price point to list your property or how much your home would be worth if you were to take equity out.
How to determine the value of a home
The same challenge is true for lenders. How to determine the value of a home is set by comparing the amount included on the application and the in-house valuation system used by each lender. Each lender will use a general valuation system (GVS) which is essentially a database of all properties and their values. These values will be set based on Canada Mortgage and Housing data, BC Assessment and other sources. If the GVS doesn’t accept the value as applied, the lender or the insurer (CMHC, Genworth or Canada Guaranty) will ask the broker to order an appraisal on behalf of the borrower.
Appraisals are conducted by companies who must meet specific industry standards and code of conduct to be approved to supply appraisals to lenders. Visit www.aicanada.ca/professional-standards/ for more details. The appraiser will visit the property to review the outside property and inside layout and condition of the property to determine the value of a home. They will then review details of similar properties sold within a recent time frame in surrounding community. This valuation of the home is used by the lender to confirm the purchase price on a purchase agreement in the case of a purchase or to determine the value of a home for refinance purposes.
I have many people ask me why some appraisals for refinance are below what they could sell their home. This is because the lenders and the appraisers will err on the side of conservative when valuing a home for refinance purposes. You are not selling the home and you are taking more money out of the value of the home. If prices were to shift downwards the home owner would now have even less equity in the home so it is prudent to be cautious when valuing a home especially in a shifting market.
Bottom line, you will have various sources of information to determine the value of a home, the BC Assessment, comparable homes listed on the MLS, the value of your neighbours home sold last month and the price set by the realtor if you were to sell. All of these numbers can be very different. It is always important to discuss these sources with your realtor and mortgage broker to help you determine the value of a home. If the valuation doesn’t meet your needs to do what you want to do then you have a choice to make — move or don’t move, refinance or don’t refinance.