Appraisal executive emphasizes key differences in the alternative space
Canadian mortgage brokers have established themselves as a key conduit between borrowers and lenders – but in the alternative lending space, that role expands to becoming the connector between borrower, lender, and appraiser.
That fact means it’s doubly important for brokers in the sector to take the time to understand what appraisers do and why they do it, according to Appraisal Institute of Canada (AIC) director Claudio Polito (pictured top).
Among the main misconceptions about an appraiser’s role, Polito told Canadian Mortgage Professional, is that an appraisal is simply a property value. “To most people – the borrower, the broker, perhaps even the lender – the value is the most important part,” he said. “But to the appraiser, the value is just a component of it. There’s a story to be told.”
That story includes neighbourhood context, physical improvements, and market activity – all of which feed into the final opinion of value. Polito also pointed out that lender requirements vary considerably, and brokers should factor this into their preparation.
“Brokers are asked to know their client and we’re asking them to know their lender as well,” he said. “A Big Five bank may have one requirement. A private lending individual may have a different requirement. Even within the same space, there are different requirements.”
Polito’s main advice for brokers is on client preparation, an area he said too many brokers overlook until problems arise. His recommendation: get ahead of potential issues by asking the right questions early.
“Rather than having the appraiser highlight potential areas of concern, have the broker be made aware of that first,” he said. “Do you have a basement apartment? Is it registered? Is it approved by the municipality? Do you have an addition? Was it done with or without permits? These are questions the appraiser will ask – better we know up front.”
What’s changed in the current market
In the current climate, expectation management on value is equally important – especially because of the significant drop in values across many markets since the peak of 2021 and 2022. The borrowers who purchased at the height of the market sometimes carry expectations that no longer reflect reality, according to Polito.
“If you purchased your property in Toronto in 2022 for $1 million and you’re asking for a home line of credit and thinking the property is worth $1.5 million, what makes you think the property has gone up half a million dollars when everything in the news says the Toronto market is declining?” he said.
The condo market has suffered an especially noteworthy downturn, leading to appraisal challenges as buyers who purchased preconstruction units are suddenly unable to secure a mortgage for the amount they agreed to buy the property for years back.
How AI is impacting the appraisal process
Another big trend to impact the appraisals space in recent years, unsurprisingly, has been artificial intelligence (AI). The rise of AI-driven property valuations is having a big say on how some borrowers, and even some lenders, approach the question of what a property is worth.
Polito still believes AI will never completely eradicate the human influence from the appraisal process. “AI can be a great tool when it’s properly applied with guardrails in place, when there’s the human element and the human involvement in it,” he said.
“But you’re seeing more and more homeowners and borrowers relying on AI – and that could be dangerous. It could lead to false expectations, either overstated or understated.”
On automated valuation models (AVMs), increasingly used by lenders in lower-risk transactions, Polito is also sceptical whether their influence will ultimately threaten the human factor.
“Take those with a grain of salt, knowing that what a platform spits out may not be completely accurate in the same way that what a professional appraiser might conclude the property is worth,” he said.
“An appraiser uses all of their senses as part of the analysis. An appraiser sees what the analytical computer doesn’t see.”
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