Unit 16: Real Estate Appraisal

Practice flashcards covering real estate appraisal concepts, principles of value, and the three approaches to valuation based on Unit 16 lecture notes.

appraisal

An opinion of value based on supportable evidence and approved methods.

appraiser

An independent professional trained to provide an unbiased opinion of value in an impartial and objective manner, following an identified appraisal process.

Appraiser Independence Requirements (AIR)

Requirements initiated by Fannie Mae that took effect October 15, 2010, to prohibit coercion and other activities that influence appraisals.

Uniform Standards of Professional Appraisal Practice (USPAP)

The set of standards established by the Appraisal Standards Board (ASB) of the Appraisal Foundation that appraisers must follow.

federally related transaction

Any real estate-related financial transaction in which a federal financial institution or regulatory agency is engaged, such as the sale, lease, or purchase of real property used as security for a loan.

property inspection waiver (PIW)

A waiver considered by Fannie Mae when the first and last names of borrowers on a previous and present loan match and the earlier appraisal meets specific criteria.

comparative market analysis (CMA)

A report prepared by real estate professionals that focuses on properties similar to the subject property in size, location, and amenities to derive a likely listing or offering price.

broker's price opinion (BPO)

A less-expensive alternative for evaluating property often used by lenders for home equity lines, refinancing, portfolio management, loss mitigation, and collections.

Value (DUST)

The monetary worth of a property based on desirability, which requires four characteristics: Demand, Utility, Scarcity, and Transferability.

market value

The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, assuming the buyer and seller act prudently and knowledgeably.

market price

A property's actual sales price.

anticipation

The principle that value is created by the expectation that certain events (like a major employer moving to an area) will occur.

change

The principle that no physical or economic condition remains constant, including natural phenomena and the behavior of the marketplace.

competition

The interaction of supply and demand where profitable businesses tend to attract similar businesses to an area.

conformity

The principle that maximum value is created when a property is in harmony with its surroundings, conforming to existing neighborhood standards.

contribution

The principle that the value of any part of a property is measured by its effect on the value of the whole parcel.

highest and best use

The most profitable single use of a property that is physically possible, legally permitted, economically or financially feasible, and maximally productive.

law of increasing returns

The law that applies as long as money spent on improvements produces an increase in income or value.

law of diminishing returns

The law that applies at the point where additional improvements do not increase income or value, regardless of expenditure.

plottage

The principle that the consolidation of adjacent lots into a single larger one produces a greater total land value than the sum of the two sites valued separately.

assemblage

The process of merging two separately owned lots under one owner.

regression

The principle that the worth of a better-quality property is adversely affected by the presence of a lesser-quality property.

progression

The principle that the value of a modest home would be higher if it were located among larger, fancier properties.

substitution

The principle that the maximum value of a property tends to be set by the cost to purchase an equally desirable and valuable substitute property.

supply and demand

The principle that the value of a product depends on the quantity available and the level of desire for that product.

sales comparison approach

An appraisal method where value is obtained by comparing the subject property with recently sold comparable properties and making adjustments for differences.

CBS and CPA

Acronyms for adjusting comparable properties: 'comp better, subtract' (CBS) and 'comp poorer, add' (CPA).

cost approach

An appraisal method based on the principle of substitution that estimates the value of land, adds construction costs, and deducts accrued depreciation.

accrued depreciation

A loss in value for any reason, including physical deterioration, external obsolescence, and functional obsolescence.

physical deterioration

Loss in value due to wear and tear; can be curable (e.g., painting) or incurable (e.g., foundation crack).

functional obsolescence

A loss in value from the market's response to outmoded or unacceptable physical or design features, such as a four-bedroom home with only one bathroom.

external obsolescence

Incurable depreciation caused by negative factors outside the subject property, such as proximity to a polluting factory.

straight-line method

Also called the economic age-life method, it assumes depreciation occurs at an even rate over a structure's economic life.

economic life

The period during which a structure is expected to remain useful for its original intended purpose.

income approach

An appraisal method based on the present value of the right to future income generated by properties like apartment buildings or retail stores.

net operating income (NOI)

Effective gross income minus annual operating expenses.

capitalization rate (cap rate)

The rate of return or yield that an investor demands for the investment of capital in a particular type of building.

Income Formula

$$\text{Net Operating Income (I)} \div \text{Capitalization Rate (R)} = \text{Value (V)}$$

gross rent multiplier (GRM)

A rough approximation of value for one- to four-unit residential rental properties, calculated as $\text{Sales price} \div \text{monthly gross rent}$.

gross income multiplier (GIM)

Used for properties with five or more units and commercial properties, calculated as $\text{Sales price} \div \text{annual gross income}$.

reconciliation

The act of analyzing and effectively weighing the findings from the three approaches to value (sales comparison, cost, and income) to produce a single opinion of market value.