Dear Urbaneer: How Much Is My Home Really Worth?

Dear Urbaneer

Welcome to our regular 'Dear Urbaneer' post, where we tackle questions asked by our clients with our insights, experience and sage advice.

This time around, we are examining how the appraisal from a lending institution or an insurance company may not fully reflect a property's true market value.

Dear Urbaneer:

It seems like every time I turn on the television or my tablet – or open the old-fashioned newspaper, there is another story about climbing real estate values in the City of Toronto. I know that homes in my own area are selling quickly and getting large sums.  Recently, I had an appraisal done and was surprised to see that the appraised value came back lower than the price range that I know neighbours have fetched recently. Why is there a gap between selling price and appraised price? What do I need to know? Will this affect the selling price?

Signed, Why Is My Property Value Out Of Whack?


Dear Out Of Whack,

Unfortunately, getting a low appraisal is not an uncommon occurrence with homeowners, who are left to ponder their property's true worth after their bank’s appraiser set the value of their home lower than they thought fair. Perhaps you or someone you know has also had similar experience with an insurance company offering a policy that barely covers the basics, especially if you’ve invested a great deal into improvements. The same perception of value goes if you are in a neighbourhood that is experiencing a meteoric property rise, scene to homes that have multiple offers and bidding wars. So, when addressing the question of how come those appraised values differ (sometimes vastly) from the sale price your neighbour recently achieved a few doors down, one must understand context – namely, exactly how does the appraisal industry establish a realistic value for real estate?

In the complex world of real estate, there are a number of bona fide approaches that can determine property value. Each approach has its merits, though the end opinion on how much your property might be worth can vary dramatically.

Here are the three most common approaches to calculating the value of real estate:

The first approach calculates the actual real costs associated with property development. Basically, the evaluator takes the cost of all components which make up your property…the land value based on its location, the cost to build a property similar in size and finishes and the cost of upgrades specific to your property like landscaping or a swimming pool. After discounting the property for age and pending repairs, one can establish the replacement cost of your property. This approach is often used by insurance companies, though it does not take into account the intangible features of a property, like historical ambience, unique setting, views and vistas, or in some instances, neighbourhood prestige or building reputation.

The second is the income approach. In this instance, the property’s value is analyzed based on the existing or projected rents the dwelling could generate. By adding the total income flow and deducting all the operating expenses (property taxes, building insurance, utility costs, repairs and maintenance, and some allowance for possible vacancies), one can determine the net income.

Allowing for a reasonable rate of return on the capital investment required (a reasonable rate of return is generally more than those generated in secure investments like money markets but less than higher risk stock ventures – at the time of this post investors are seeking a 5% return on investment), one can establish a financial value for the property. In this instance, absolutely no emotion is involved to determine a sentiment-free value. A bank might use this prior to approving a mortgage for the property in question.

A third approach estimates the market value of the dwelling. In this instance, one compiles recent sales of matching properties in a similar location in order to create a tangible framework for comparison. Sales of similar units in your building, or of houses on your street, are used to start. Then, properties having the same size and features, like private parking or comparable renovations and upgrades, are integrated into the analysis. Further to this, adding properties with similar intangible benefits like vistas, architectural merit, or additional accessory income (like a basement apartment) refine the value matrix and effectively establish the market value of the property. This analysis is subjective, as it estimates a value for the intangible qualities your property may have that others don’t. Given it can never be exact, a market value approach presents a range estimating the sale price of your property that buyers might bid on the open market given a reasonable amount of time without undue pressures or influence.

Have you experienced a similar scenario, or wondered about what your property might be worth (and/or fetch on the open market)? The Urbaneer team has decades of experience in the Toronto housing market, a comprehensive skill set for anticipating the market’s next move, and plenty of intuition that serves our clients right. We solidly derive our expertise through on-going research, observation and a constant diet of housing facts and figures that helps us monitor trends. We also have an unparalleled ability to match person to property, as well as price to property – so whether you are buying or selling, please know we’re here to help!


~ Steven and the urbaneer team

earn your trust, then your business

Dear Urbaneer

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