The real estate market is pushing upwards and some wary consumers are wondering if the appraisal of the real estate is keeping up with the market value. Genworth, a mortgage insurance company, reminds us that purchase price, or what might be considered market value, is only one factor when considering the value of a property:
There are a number of factors at play, other than purchase price, when conducting a property risk valuation.
“Our focus on property valuations is to assess not only the property value but the overall marketability of the property such as location of the property,” says Eugene Ji, director of risk operations with Genworth Canada. “What is around it? Is the property consistent with the neighbourhood?”
“Fundamentally, our objectives are the same as our lender customers’ — to assess the quality of the real estate. While we may have different tools and perspectives, the underlying goal is not only to try to validate the property value but also to get a good feel for the overall marketability of that property.”
Given our insurance covers the life of the mortgage, it is critical that we assess the real estate beyond the purchase price. While a particular purchase price may be supported today, properties that are less marketable or are in highly volatile housing markets can experience significant deterioration in value in the event of borrower default.
“It’s supply and demand dynamics,” says Ji. “If you don’t have the broad housing buyers’ market, your opportunities to sell a home are obviously diminished.” And that puts pressure on the overall property value.
“In order to increase marketability of a property, you want a property that’s consistent and in line with what else is on the street or neighbourhood,” he says. “You think of that person who built a multimillion-dollar home on a street where property values are $300,000 — the marketability of that property just doesn’t fit. Buyers looking to purchase a high-end home will likely want to be in high-end neighbourhoods.”
Valuation isn’t solely about the property itself; it’s about the neighbourhood, how long it takes to sell properties in that neighbourhood and what similar properties there have sold for recently.