Real Estate Principals Chapter 11

Appraisal

An estimate or opinion of the value of a piece of property as of a particular date. Also called valuation.

Elements of value

In appraisal, the four basic attributes of a property that help determine its value: utility, scarcity, demand, and transferability.

Market price

The current price generally being charged for something in the marketplace. The price actually paid for a property.

Market value

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Sometimes called value in exchange.

Value

The present worth of future benefits.

Value in use

The value of a property to its owner or to a user. Also called use value or value in use.

Anticipation

An appraisal principle which holds that value is created by the expectation of benefits to be received in the future.

Balance

An appraisal principle which holds that the maximum value of real estate is achieved when the agents in production (labor, coordination, capital, and land) are in proper balance with each other.

Change

An appraisal principle which holds that it is the future, not the past, that is of primary importance in estimating a property's value, because economic and social forces are constantly changing it.

Competition

An appraisal principle which holds that profits tend to encourage competition, and excess profits tend to result in ruinous competition.

Conformity

An appraisal principle which holds that the maximum value of property is realized when there is a reasonable degree of social and economic homogeneity in the neighborhood.

Contribution

An appraisal principle which holds that the value of real property is greatest when the improvements produce the highest return commensurate with their cost (the investment).

Highest and Best Use

The use which, at the time of appraisal, is most likely to produce the greatest net return from the property over a given period of time.

Progression

An appraisal principle which holds that a property of lesser value tends to be worth more when it is located in an area with properties of greater value than it would be if located elsewhere. The opposite is the principle of regression.

Regression

An appraisal principle which holds that a valuable property surrounded by properties of lesser value will tend to be worth less than it would be in a different location. The opposite is the principle of progression.

Substitution

A principle of appraisal holding that the maximum value of a property is set by how much it would cost to obtain another property that is equally desirable, assuming that there would not be a long delay or significant incidental expenses involved in obtaining the substitute.

Supply and Demand

A principle holding that value varies directly with demand and inversely with supply. That is, the greater the demand the greater the value, and the greater the supply the lower the value.

Building Data

Data gathered by an appraiser concerning the improvements themselves, such as their dimensions and quality of construction.

Depth Table

Mathematical table used in appraisal to estimate the differences in value between lots with different depths. Frontage has the greatest value, and land at the rear of a lot has the least value.

Feasibility Study

A cost-benefit analysis of a proposed project, often required by lenders before giving a loan commitment.

Frontage

The distance a property extends along a street or a body of water; the distance between the two side boundaries at the front of the lot.

Orientation

The placement of a house on its lot, with regard to its exposure to the sun and wind, privacy from the street, and protection from outside noise.

Plottage

The increment of value that results when two or more lots are combined to produce greater value. Also called the plottage increment.

Site Data

Data gathered by an appraiser concerning the land the improvements are built upon, like the length of the site’s frontage and the topography of the lot.

Arm’s Length Transaction

A transaction in which there is no family relationship, friendship, or preexisting business relationship between the parties.

Comparable

In appraisal, a property that is similar to the subject property and that has recently been sold. The sales prices of this property provide data for estimating the value of the subject property using the sales comparison approach. Also called a comp or a comparable sale.

Elements of Comparison

In the sales comparison approach to appraisal, considerations taken into account in selecting comparables and comparing comparables to the subject property. They include date of sale, location, physical characteristics, and terms of sale.

Sales Comparison Approach

One of the three main methods of appraisal, in which the sales prices of comparable properties are used to estimate the value of the subject property. Also called the market data approach.

Curable Depreciation

Deferred maintenance and functional obsolescence that would ordinarily be corrected by a prudent owner, because the correction cost could be recovered in the sales price.

Cost Approach

One of the three main methods of appraisal, in which an estimate of the subject property's value is arrived at by estimating the cost of replacing (or reproducing) the improvements, then deducting the estimated accrued depreciation and adding the estimated market value of the land.

Depreciation

In appraisal, a loss in value (caused by deferred maintenance, functional obsolescence, or external obsolescence).

External Obsolescence

Loss in value resulting from factors outside the property itself, such as proximity to an airport. Also called economic obsolescence or external inadequacy.

Functional Obsolescence

Loss in value due to inadequate or outmoded equipment, or as a result of a poor or outmoded design.

Incurable Depreciation

Deferred maintenance, functional obsolescence, or external obsolescence that is either impossible to correct, or not economically feasible to correct, because the cost could not be recovered in the sales price.

Physical Deterioration

Loss in value (depreciation) resulting from wear and tear or deferred maintenance.

Replacement Cost

In appraisal, the current cost of constructing a building with the same utility as the subject property with modern materials and construction methods.

Reproduction Cost

In appraisal, the cost of constructing a replica (an exact duplicate) of the subject property, using the same materials and construction methods that were originally used, but at current prices.

Capitalization

A method of appraising real property by converting the anticipated net income from the property into the present value. Also called the income approach to value.

Effective Gross Income

A measure of a rental property's capacity to generate income; calculated by subtracting a vacancy factor from the economic rent (potential gross income).

Gross Income Multiplier Method

A method of appraising residential property by reference to its rental value. Also called the gross rent multiplier method.

Income Approach

One of the three main methods of appraisal, in which an estimate of the subject property's value is based on the net income it produces; also called the capitalization method or investor's method of appraisal.

Net Income

The income that is capitalized to estimate the property's value; calculated by subtracting the property's operating expenses (fixed expenses, maintenance expenses, and reserves for replacement) from the effective gross income. Also called net operating income.

Operating Expenses

For income-producing property, the fixed expenses, maintenance expenses, and reserves for replacement; does not include debt service.

Potential Gross Income

A property's economic rent; the income it could earn if it were available for lease in the current market.

Reconciliation

The final step in an appraisal, when the appraiser assembles and interprets the data in order to arrive at a final value estimate. Also called correlation.