Appraisals with Market Rents - What's the Fuss?*
The Office of the Superintendent of Financial Institutions (OSFI) implemented regulations in January 2018 that changed the way the federally regulated lenders qualify mortgages. Without delving into all the changes, we'd like to focus our attention on how individuals and financial institutions have found creative ways to mortgage qualification. One route is to propose that the borrower can rent out a room – or multiple rooms – to help meet mortgage their mortgage payments. Another is to use rents from another property owned by the applicant when underwriting a new mortgage application.
This has resulted in appraisers receiving more requests from lenders and mortgage specialists for market rent information for a specific property as a stand-alone report or to accompany a full residential appraisal assignment for mortgage financing purposes.
Potential risk associated with market rent
Appraisers often receive requests from lenders and mortgage specialists that conflict with their standards of professional practise.
The greatest risk to appraisers arises when they "...agree to the request for a ‘one-pager’ market rent report or to ‘throw the market rent in as a one-liner’ in the market value report for a specific property (a full residential appraisal report)." ~ Appraisal Institute of Canada
It's fair to assume that mortgage loans requiring confirmation of rents are more likely to default, resulting more risk of liability for appraisers. ‘One-page’ or ‘one-line’ market rent reporting regularly lack supporting data and analysis in reports. This increases an appraiser's risk and may make it more difficult to defend against a claim.
Writing a compliant report with a market rent value
Appraisers should turn to their standards of professional practise for guidance. Depending on what is being valued, a market rent assignment can fall under different standards. The following is a general ‘rule-of-thumb:’
- If the assignment is for a specific, identifiable property, then the Real Property Appraisal Standard
- If the assignment is for a general property type, without identifying a specific subject property, then the Consulting Standard
What's included in a Market Rent Report?
Market Rent Reports should provide data and analysis. Confirmed leases, current and expired rental listings, and web sites that feature listings of properties for rent are all examples of data that can be used in the analysis. A report’s research and analysis will determine the validity of the data and its applicability to the assignment.
"The source of the data should be noted in a report. Sources may include an appraiser’s own database, property managers, landlords, Kijiji, Craigslist, newspaper ads or billboards, a CMHC report, and/or a market research report. There is no requirement in the report for a specific number of comparable sales, rents, or sales with rents; rather, the requirement is to include a sufficient amount of reliable data to meet the reasonable appraiser test. If there is a current rental contract in place for the property, the actual rent the property is earning should be noted in the report." ~Appraisal Institute of Canada
A report can only include data and information that is available at the time the report is written. Thoroughly explaining any lack of data (if applicable) and reasoning in the report provide lenders with a greater depth of understanding of the final report, including market rent conclusions.
Market rent amounts - how are they presented?
It's acceptable to provide a single point value, a range of values, or an indication of value, e.g., ‘not less than’ or ‘not greater than’ a specified amount, when presenting market rents.
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*This article was written by Christopher Bisson and based on an article published by the Appraisal Institure of Canada. ACCESS THE AIC ARTICLE HERE