How Is 'Fair Market Value' Calculated?

Estimating the value of a Toronto house or condominium suite can often be a challenge. The seller wants more, the buyer wants less and, sometimes, even the seller wants less. How do you determine fair market value?

The answer is sometimes simple and sometimes complex, depending on the property, the neighbourhood and the economy. One sure fact - once established, fair market value is fair market value as of the day the property was appraised - no matter what the reason for the appraisal.

Seems straightforward, but surprisingly, not all individuals in the real estate business agree on this point. There are several elements that are analysed in estimating the fair market value of a property, but they all relate to the property itself, the surrounding area and the economy in that particular market.

Whether it is for financing, marital settlement, tax assessment, move up or down, litigation or inheritance, the intended use for an independent appraisal report should not impact the fair market value of a property. A sale price, however, may often be negotiated based on these types of home owner motivations.

Each property is evaluated for its own attributes relative to the market on a given day by applying the established approaches to value. There is no single factor that can be applied.

The primary elements that are used to arrive at a value are time, location and lot size. The appraiser (either a professional appraiser OR Realtor) conducts extensive research and fieldwork to undertake the necessary analysis that will produce the unbiased report for a client. It would be unethical for an appraiser to skew their evaluation to their client's agenda . Clients are paying for reliable, independent, third party opinion, and that is exactly what they should receive.

What exactly is fair market value? The Appraisal Institute of Canada (AIC) defines it like this: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeable and assuming the price is not affected by undue stimulus... The definition goes into more detail, but you get the picture.

There are three generally accepted approaches used by appraisers and real estate agents to estimate the value of a property - the income method, replacement cost approach and the most common direct sales comparison method. It is incumbent on the appraiser to select the approach or approaches they are going to use to assess the property in order to properly complete the assignment.

When an appraisal is done for financing for residential properties, a certified appraiser will often include the cost approach (houses only) but this method is not often used by real estate agents unless the home is fairly new. Realtors most often use the direct sales comparison method... pulling off from the Toronto Real Estate Board recent sales of similar houses or similar sized condo suites... to determine market value.

Appraising is one of those areas where everyone has an opinion, some more educated than others. But when you take a closer look and see the level of detail and the breadth of knowledge that is required, it's a real eye-opener. An appraiser or Realtor's ability to take vast quantities of data, weave it into understandable information and arrive at a single, supportable number (or narrow range of prices) takes education, experience, time and expertise.

If you would like a preliminary idea of what your Toronto house or condo is worth, order a free Over-The-Phone evaluation! You'll be given enough information to do some financial planning when you're considering selling in the next 30-120 days.