19: Real Estate Appraisal

Unit 19: Real Estate Appraisal

Anticipation

The appraisal principal holding that value can increase or decrease based on the expectation of some future benefit or detriment produced by the property.

Appraisal

An estimate of the quantity, quality, or value of something. The process through which conclusions of property value are obtained; also refers to the report that sets forth the process of estimation and conclusion of value.

Appraiser

An independent person trained to provide an unbiased opinion of value in an impartial and objective manner according to the appraisal process.

Assemblage

The combination of two or more adjoining lots into one larger tract to increase their total value.

Broker’s Price Opinion (BPO)

A less-expensive alternative of valuating properties often used by lenders working with home equity lines, refinancing, portfolio management, loss mitigation, and collections. Many simply consist of a “drive by” that verifies the existence of the property, along with a listing of comparable sales.

Capitalization Rate

The rate of return a property will produce on the owner’s investment

Change

The appraisal principle that holds that no physical or economic condition remains constant.

Comparative Market Analysis

A comparison of the prices of recently sold homes that are similar to the listing seller’s home in terms of location, style, and amenities.

Competition

The appraisal principle starting that excess profits generate competition

Conformity

The appraisal principle holding that the greater the similarity among properties in an area, the better they will hold their value.

Contribution

The appraisal principle that states that the value of any component of a property is what is gives to the value of the whole or what its absence detracts from the value.

Cost Approach

The process of estimating the value of a property by adding to the estimated land value the appraiser’s estimate of the reproduction or replacement cost of the building, less depreciation.

Depreciation

1. In appraisal, the loss of value in property due to any cause, including physical deterioration, functional obsolescence, and external obsolescence.

2. In real estate investment, an expense deduction for tax purposes taken over the period of ownership of income property.

Economic Life

The number of years during which an improvement will add value to the land.

External Obsolescence

Reduction in a property’s value caused by outside factors (those that are off the property)

Functional Obsolescence

A loss of value to an improvement to real estate arising from functional problems, often caused by age or poor design.

Gross Income Multiplier (GIM)

A figure used as a multiplier of the gross annual income of a property to produce an estimate of the property’s value.

Gross Rent Multiplier (GRM)

The figure used as a multiplier of the gross monthly income of a property to produce an estimate of the property’s value.

Highest and Best Use

The possible use of a property that would produce the greatest net income and thereby develop the highest value.

Income Approach

The process of estimating the value of an income-producing property through capitalization of the annual net income expected to be produced by the property during its remaining useful life.

Index Method

The appraisal method of estimating building costs by multiplying the original cost of the property by a percentage factor to adjust for current construction costs.

Law of Increasing Returns

Law that applies as long as money is being spent on improvements produces an increase in income or value.

Law of Diminishing Returns

Law that applies when at the point where additional improvements do not increase income or value.

Market Value

The most probable price that property would bring in an arm’s-length transaction under normal conditions on the open market.

Net Operating Income (NOI)

The income projected for an income-producing property after deducting losses for vacancy, collection, and operating expenses.

Physical Deterioration

A reduction in a property’s value resulting from a decline in physical condition; can be caused by actions of the elements or by ordinary wear and tear.

Plottage

The increase in value or utility resulting from the consolidation (assemblage) of two or more adjacent lots and one larger lot

Progression

An appraisal principle that states that, between dissimilar properties, the value of the lesser-quality property is favorably affected by the presence of the better-quality property.

Quantity-Survey Method

The appraisal method of estimating building costs by calculating the cost of all of the physical components in the improvements, adding the cost to assemble them and then including the indirect costs associated with such construction.

Reconciliation

The final step in the appraisal process, in which the appraiser combines the estimates of value received from the sales comparison, cost, and income approaches to arrive at a final estimate of market value of the subject property

Regression

An appraisal principle stating that, between dissimilar properties, the value of the better-quality property is affected adversely by the presence of the lesser-quality property

Replacement Cost

The construction cost at current prices of a property that is not necessarily an exact duplicate of the subject property but serves the same purpose or function as the original.

Reproduction Cost

The construction cost at current prices of an exact duplicate of the subject property.

Sales Comparison Approach

The process of estimating the value of a property by examining and comparing actual sales of comparable properties.

Square-Foot Method

The appraisal method of estimating building costs by multiplying the number of square feet in the improvements being appraised by the cost per square foot for recently constructed similar improvements.

Straight-Line Method

A method of calculating depreciation for tax purposes, computed by diving the adjusted basis of a property by the estimated number of years of remaining useful life.

Substitution

An appraisal principle stating that the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property, assuming that no costly delay is encountered in making the substitution.

Supply and Demand

The appraisal principle that follows the interrelationship of the supply of and demand for real estate. Because appraising is based on economic concepts, this principle recognizes that real property is subject to the influences of the marketplace. as is any other commodity.

Uniform Standards of Professional Appraisal Practice (USPAP)

A set of standards that details information required of an appraisal of residential property. This Uniform Residential Appraisal Report is required by many government agencies.

Unit-in-Place Method

The appraisal method of estimating building costs by calculating the costs of all the physical components in the structure, with the cost of each item including its proper installation, connection, and so forth. Also called the segregated cost method.

Value

The power of a good or service or service to command other goods in exchange for the present worth of future right to its income or amenities.