DRE Review Chapter 3

Appraisal

An individual’s opinion of a property’s value on a specific date, documented in an appraisal report.

Broker Price Opinion (BPO)

An agent’s opinion of a property’s fair market value based on comparable sales.

Capitalization Approach

An appraisal method used by an appraiser to arrive at a property’s value based on the present worth of a property’s future net operating income.

Capitalization Rate (Cap Rate)

The annual rate of return on investment produced by the operations of an income property or sought by an investor on the investment of capital. The cap rate is calculated by dividing the net operating income by the price asked or offered for income property.

Comparable Sales

Sales of properties recently sold which have similar characteristics as the subject property being evaluated and are used for analysis in the appraisal of the subject property.

Depreciation

Loss of property value brought about by age, physical deterioration or functional or economic obsolescence. The term used to account for the annual tax-free return of capital invested in improvements over the life of the improvements, as a reduction in the property’s cost basis.

Economic Life

The period of time over which a property will yield a return on capital invested to own it.

Economic Obsolescence

A loss in value of a property due to external factors and not the condition of the property itself.

Effective Age

The physical age of a property based on the condition of the structure, distinct from its chronological age.

Elements of Value

Factors that must be present for real estate to have value: demand, utility, scarcity and

transferability.

Ethics

That branch of fiduciary science, idealism, justness, and fairness, which treats of the duties which a member of a profession or craft owes to the public, client or partner, and to professional brethren or members. Accepted standards of right and wrong. fiduciary conduct, behavior or duty.

Fair Market Value (FMV)

The price a reasonable, unpressured buyer would pay for property on the open market.

Financial Analysis

The consideration of the durability, quantity and quality of income and expenses generated and incurred by an income-producing property.

Functional Obsolescence

A loss of value due to adverse factors within the structure which affect the utility of the structure, and thus its value and marketability.

Gross Rent Multiplier

A factor which, when multiplied by the gross income of a property, produces an estimate of the property’s value.

Highest and Best Use

An appraisal phrase addressing the use of a property which is most likely to produce the greatest net return on the land and/or buildings over a given period of time.

Income Approach

One of three methods of the appraisal process applied to income producing property to develop the appraiser’s opinion of value.

Influences on Value

An aspect of the principle of change, recognizing the effect of physical, economic, government and social changes on real estate value.

Loan-to-Value Ratio (LTV)

A ratio stating the outstanding mortgage balance as a percentage of the mortgaged property’s fair market value. The degree of leverage.

Market Comparison

An appraisal method used by an appraiser to arrive at a property’s value by a comparison of recent sales prices of similar properties, adjusted for differences in the properties.

Narrative Report

A summary of all factual materials, techniques and appraisal methods used by the appraiser in establishing the value of a property. This is the most thorough type of appraisal report.

Opportunity Cost

The cost of an action that is forgone when choosing to take an alternative action, usually a consideration when making one investment over another.

Physical Life

The total number of years a building is presumed to potentially exist in a productive capacity.

Principles of Value

The application of several appraisal principles to arrive at a final value. The basic principle is substitution.

Reconciliation

The final step in the appraisal process. Placing weight on the alternative value conclusions, to arrive at a final value decision.

Replacement Cost

The cost to replace a structure with one having utility equivalent to that being appraised, but constructed with modern materials and according to current standards, design and layout.

Return on Investment (ROI)

A measure of annual income or profits on a sale in relation to capital invested.

Site Valuation

The appraised valuation of the ground (site) separate from any structure (improvement) that may be on the site.

Value

The present worth stated in dollars of the future benefits arising out of the ownership of a property.

Absorption Rate

The estimated time required to sell or lease property within a designated area at its fair market value.

Ad Valorem

Real estate taxes imposed on property based on its assessed value.

Vacancy Rate

The percentage of a building’s space that is not rented over a given period.