Understanding Fair Market Value Appraisals
What is an FMV appraisal?
A fair market value (FMV) appraisal in an unbiased estimate of what a property would sell for in an open and competitive market. An FMV appraisal takes in factors like location, condition and recent comparable sales into consideration when determining the property’s value. This type of appraisal aims to reflect the asset’s true value in the current market.
For homeowners who are exploring a Home Equity Sharing Agreement (HESA), the accuracy of an FMV is crucial because it determines the starting point for shared appreciation calculations at the end of the agreement. Unlike a loan, where the appraisal might simply validate collateral value, a precise FMV appraisal ensures fairness for both the homeowner and the HESA provider.
How is an FMV appraisal conducted?
To produce an FMV appraisal, a certified professional, such as one with an Accredited Appraiser Canadian Institute (AACI) or Canadian Residential Appraiser (CRA) designation, follows a thorough approach, including:
- Property inspection: a thorough examination of the property, including size, condition, layout and any unique features.
- Market analysis: reviewing recent sales of comparable properties in the area to establish benchmarks for value.
- Location factors: evaluating the neighborhood, proximity to amenities and overall market demand.
- Adjustments: accounting for any factors that make the property unique, such as renovations, upgrades or specific market conditions.
This meticulous process ensures that the valuation is as accurate and fair as possible. A detailed appraisal report captures all of this information and analysis, allowing homeowners to understand the factors affecting their home’s value.
The power of an independent opinion: ensuring fairness in your HESA
The independence of an appraiser is vital to ensuring fairness and credibility in the valuation process, which is incredibly important for a HESA. At Clay Financial, we work exclusively with third-party appraisers who are not employees of our company. These professionals bring their own reputations and extensive experience to the table, and are often leaders in the appraisal industry and have been involved in industry organizations and accreditation bodies. Before collaborating with an appraiser we thoroughly vet their credentials, focusing on those who specialize in FMV assessments. Our commitment to working with highly regarded, independent experts provides homeowners with confidence in the appraisal’s accuracy and ensures a trustworthy foundation for HESAs with homeowners.
For homeowners, an accurate FMV appraisal offers more than just a valuation; it provides peace of mind. Knowing that the starting point for a HESA is based on a fair and unbiased assessment ensures transparency and fairness throughout the agreement. Furthermore, a precise FMV protects homeowners from undervaluations, which could reduce the equity they can access. The neutrality of the FMV appraisal ensures both parties are entering the agreement on equal footing, fostering trust and long-term satisfaction.
But homeowners are not relying on the appraiser’s reputation alone. Each FMV appraisal is backed by a thoroughly researched report that details how the appraiser determined their home’s fair market value. These reports include market data as well as a detailed breakdown of comparable properties and the associated adjustments, like showing the incremental value of an extra bedroom. At Clay Financial, we always provide these reports to our homeowners so they can be confident in their home’s valuation.
What does an FMV appraisal cost?
Transparency is a key component of the appraisal process at Clay Financial, especially as it relates to costs. Homeowners can generally expect appraisal fees to fall within a range of $400 to $600 plus HST, though this can vary depending on property size, location and complexity.1 We believe in providing homeowners with clear, upfront quotes during the appraisal process for the HESA to ensure that there are no surprises and that every step is handled with fairness.
Home Equity Sharing Agreements (HESA) and FMV
A HESA from Clay Financial is a unique way to access your home equity without taking on debt. You receive a lump-sum cash payment upfront (minus the cost of the FMV appraisal and a home inspection) with no monthly payments. In return, you agree to share a portion of your home’s future value with us based on how much it has appreciated (or depreciated).
The HESA has a flexible term of up to 25 years, concluding when you sell your home, buy out the agreement or pass away. There are no age restrictions, no risk of eroding your existing equity and no ongoing payments to worry about. At the end of the HESA, you make a single payment based on the equity initially accessed and our agreed share of the home’s change in value. If you have sufficient equity built up, a HESA can also complement existing financial products like a mortgage or HELOC, offering you even greater financial flexibility.
Setting your HESA’s limits
The FMV appraisal is critical for determining the maximum HESA amount you can receive, as it sets the benchmark for two key limits. First, the HESA amount cannot exceed 17.5% of your home’s appraisal value or $500,000. Second, the combined total of the HESA amount plus any existing debt secured by the property cannot exceed 75% of that same appraised value.
Establishing your home’s starting value
The FMV appraisal also informs the starting value of your home for the purpose of calculating our share of the change in value at the end of the HESA. To establish that starting value, a 5% risk adjustment is applied to the valuation in the FMV appraisal. This discount creates a fair starting point by accounting for the inherent uncertainty in any appraisal (since the homeowner is not actually selling their home) and the significant costs that a homeowner avoids by not actually selling their home, such as real estate commissions, legal fees, staging, and moving costs.
You can see how the fair market value of your home affects the amount of equity that you can access and the calculation of your payment at the end of the HESA in different scenarios using our HESA Calculator.
Seamless process from start to finish
An FMV appraisal is an integral part of Clay Financial’s HESA, ensuring transparency, fairness and accuracy for homeowners and providers alike. By delivering a clear and unbiased valuation of your property, an FMV appraisal establishes a reliable foundation for accessing equity and sharing in the future appreciation (or depreciation) with confidence.
We also make the process as seamless as possible from start to finish. Begin by getting an estimate and applying online. Once your application is submitted, we’ll review it and provide you with an offer letter within a couple of business days if your home qualifies. After accepting our offer letter, we’ll quickly connect you with one of the FMV appraisers that we work with. We handle payment and so all you need to do is to find a convenient time for the appraisal and let the appraiser into your home (or have another adult available to do so).
After the appraisal and the other conditions in the offer letter are met, we’ll prepare your HESA documents for you to review with your lawyer. After you receive independent legal advice, all documents are signed and all conditions are met, you’ll receive your funds 10 business days later, unlocking your home’s value without the burden of additional debt.
Whether you’re seeking a flexible financial solution or a way to access your equity with confidence, Clay Financial’s process ensures you’re making informed decisions every step of the way. A trusted FMV appraisal is more than just a valuation – it’s a cornerstone of a fair agreement designed with your needs in mind.
