Whether you’re purchasing a home or looking to insure a valuable collection or another form of property you may need to have an appraisal done in order to get a fair estimate of value. An appraisal is generally a thorough and comprehensive evaluation of a collection or items to determine their replacement value . Appraisers are highly trained professionals who understand their industry and who know how to carefully evaluate the property or article in question.
The best appraisals are objective and unbiased. Such appraisals will include information regarding intended uses warnings about misuse they will describe how the appraiser arrived at the assigned value and also include any limiting conditions or extraordinary assumptions as to how it has been identified graded tested and inspected.
What is the difference between a city assessment and an insurance appraisal?
Many owners rely on the assessed values provided by their city or town for their insurance values and this can lead directly to the aforementioned over inflation. Assessment valuations are derived from the calculation of: land value + building construction cost + market speculation – depreciation factors, so from this equation, we can see that three out of the four factors have nothing to do with actual reconstruction costs. When assessments, and similarly market value appraisals are relied upon for insurance values, it becomes easy to see how this can lead to an over insurance situation.
An insurance appraisal on the other hand, is the best way to ensure that the level of insurance is accurate and that you’re not paying too much in premiums. An insurance appraisal is based on the following calculations: Reconstruction cost of the building + reconstruction cost of site improvements (landscaping) + the cost of demolition and debris removal. These are the three main components of a professional insurance appraisal and the three that are required to ensure that you have a complete report of the cost to reconstruct your property.
Breaking down these three components further, the reconstruction cost of the building takes into consideration construction material costs, labour costs, building/ fire codes, bylaws, architectural fees, developer overhead and profit, plus soft costs such as permits/ inspection etc. Secondly, the site improvements take into consideration roadways, fences, sidewalks, exterior lighting etc, plus soft landscaping items such as grass, trees and shrubs. Lastly, the cost for demolition and debris removal is a very important inclusion in the valuation, as this is often the very first amount to be taken out of a policy when there is a claim.
The importance of having an accurate valuation of your property
More than ever amidst today’s rising insurance costs, it becomes necessary to make sure you have an accurate valuation on your property, as today’s inaccuracies are only compounded over future years. As an example, an investor had bought a six-plex apartment building five years ago and had been incorrectly insuring the property for the sum of the market values of all the units. This added up to $1.75 million, so that’s what he insured for. It came as quite a surprise then when he received the insurance appraisal which valued the property at $1.25 million to reconstruct it completely. Unnecessarily, he had been paying an additional $500,000 in premium per annum over a period of five years, which certainly impacted this investor’s return on investment.
What is the International Society of Appraisers (ISA)?
Brokers will frequently recommend using members of the ISA to conduct an appraisal. The International Society of Appraisers is an association consisting of independent appraisers throughout Canada and the US. The ISA has specialists trained to provide a meticulous and comprehensive evaluation no matter what needs to be appraised. Association with the ISA lets you know that their credentials can be verified and that they have in fact completed the courses relevant to Uniform Standards of Professional Appraisal Practice (USPAP).
What should an appraisal for insurance purposes include?
Upon completion of your appraisal you should receive a signed certification page along with a detailed property description. An appraisal offers you a benchmark against which you might determine the value of your specific piece of property. With this when it comes to your insurance policy you are protected your broker can make sure you have the appropriate coverage and your insurance company understands more precisely what it is they are insuring.
If you’re not sure where to turn when looking for an appraiser you might start by asking your broker. They will more than likely have a list of highly recommended appraisers with whom they’ve previously worked.
Given the relatively low costs, an insurance appraisal is often a very worthwhile expense to justify versus the costs paid monthly towards excess premiums,. With an annual valuation update service also available, a property owner can be confident that their year to year insurance costs are never exceeding what they should be.