Finances

Market Value

Market value, according to the Appraisal Institute of Canada (AIC) is, “the most probable price in terms of money which a property should bring in, in a competitive and open market, under all conditions required to a fair sale. Implicit in this definition is the consummation of a sale as of a specific date and the passing of title from seller to buyer under conditions whereby:

  • Buyer and seller are typically motivated;
  • Both parties are well informed or well advised, and each acting in what he considers his own best interest;
  • A reasonable time is allowed for exposure in the open market;
  • A payment is made in terms of cash in Canadian dollars or in terms of financial arrangements comparable thereto.”

Market value is not to be confused with selling price. In the best of all possible worlds, market value tends to align fairly closely with selling price, but that may not always be the case. How then do professionals determine market value? Well, they can't determine it, but they can estimate it, using as their basis successive selling prices in comparable homes.

For example, an appraiser trying to estimate the market value of a home would analyze the neighbourhood and identify the three most pertinent properties that sold within the immediate area over the past few months through arm's length transactions (i.e., not through "undue influences", such as a transaction that might take place as an inter-familial transaction or through Power of Sale). Given their selling prices, he or she would then make various adjustments to the properties in order to estimate the subject’s market value. The REALTOR® then estimates the approximate value of each adjustment.

Property Sales Price

Sale Price

Total Adjustments

Adjusted Sale Price

Comparable A

$179,000

+ $4,500

$183,500

Comparable B

$193,000

+ -$8,500

$184,500

Comparable C

$188,000

- $2,000

$186,000

Based on these adjusted sales prices and other factors and using the direct comparison approach, the appraiser would then come up with a market value for the home in question in a range between $183,500 to $186,000, most probably $185,000.

What is an appraisal?

An appraisal is a report containing information relevant to independent property valuation, including the purpose of the appraisal, other qualifying conditions, neighbourhood conditions, property identification, data analysis, the value estimate and the effective date of the appraisal. All reports are also signed and may contain support material such as maps, charts, or photographs.

All reports will demonstrate either one or more of the three basic data-processing methodologies used to arrive at an indication of value:

  • The Cost Approach estimates the cost of building a new property identical to the subject being appraised, based on current prices and subtracting accumulated depreciation and adding the estimated land value. This approach is seldom relied upon as the cost of vacant land in older, established neighbourhoods is non-existent. Also, depreciation can also be very difficult to determine. Most financial institutions still require this approach, but it is very seldom used by a prospective buyers or sellers.
  • The Income Approach may be used for income-producing properties (4plex and up properties) and is based on the theory that value is the present worth of the income stream the property is capable of producing when developed to its fullest use. The net operating income from the property is capitalized into value by the appropriate method and rate.
  • The Direct Comparison Approach is based upon the theory that an informed purchaser would pay no more for the property than the cost of acquiring another existing equivalent property. The value estimate is based on the selling price of comparable properties.

For a directory of AIC Members, you can go to the website of either the Ontario Association of the Appraisal Institute of Canada or the Appraisal Institute of Canada.

This information is provided by the London and St. Thomas Association of REALTORS®. The information herein is believed to be accurate and timely, but no warranty as such is expressed or implied.