Real Property Appraisal – Core Vocabulary

Vocabulary flashcards covering key terms and concepts from the Real Property Appraisal lecture notes, including the sales comparison, cost, and income approaches.

Sales Comparison Approach

Appraisal method that estimates value by comparing the subject property to recently sold similar properties (comps) in the same market area; also called the market data or market comparison approach.

Comparable Sales (Comps)

Recently sold properties with characteristics similar to the subject property that are used for value comparison in the sales comparison approach.

Matched Pair Analysis

Technique that isolates the value of a single property feature by comparing pairs of similar sales where only that feature differs.

Adjusting Comparables

Process of adding or subtracting value to comparable sales so they mirror the subject’s features, following the rule: add for inferior, subtract for superior features.

Sequence of Adjustments

Required order when adjusting comps: (1) Property rights conveyed, (2) Financing terms, (3) Market conditions, (4) Location, (5) Physical characteristics.

Property Rights Conveyed

Adjustment category that accounts for differences in ownership interests transferred (e.g., fee simple vs. partial interests).

Financing Terms (Appraisal)

Adjustments made for concessions such as below-market interest rates, seller financing, or points paid that affect sale price.

Market Conditions Adjustment

Percentage adjustment reflecting changes in market momentum between the comparable’s sale date and the appraisal date.

Location Adjustment

Alteration for differences in neighborhood or site position between the comp and the subject property.

Physical Characteristics Adjustment

Dollar adjustments for tangible differences such as size, quality, condition, or amenities.

Cost Approach

Appraisal method that values property by estimating the cost to build the improvements, subtracting depreciation, and adding land value; useful for special-purpose properties and insurance valuations.

Replacement Cost

Cost to build a functional equivalent of a structure using modern materials and standards.

Reproduction Cost

Cost to build an exact replica of a structure with the same materials and workmanship as the original.

Depreciation (Appraisal)

Any loss in value to improvements from physical wear, functional issues, or external factors; land is not depreciated.

Curable Depreciation

Loss in value that can be remedied economically, with the cost of repair justified by the value added.

Incurable Depreciation

Loss in value that cannot be remedied cost-effectively because repair costs exceed added value.

Physical Deterioration

Depreciation caused by wear and tear or deferred maintenance; typically the most common and curable form.

Functional Obsolescence

Loss in value due to design flaws or outdated features inherent in the structure.

External (Economic) Obsolescence

Depreciation resulting from factors outside the property’s control, such as nearby pollution; usually incurable and most serious.

Economic Life

Period during which a building can be used profitably for its intended purpose; also called useful life.

Effective Age

Appraiser’s estimate of a building’s age based on its condition and obsolescence, not its chronological age.

Age-Life Ratio

Fraction found by dividing effective age by economic life; applied to replacement cost to estimate accrued depreciation.

Site Value (Site Valuation)

Value of land plus enhancements (utilities, grading, etc.) needed to make it ready for construction.

Income Approach

Appraisal method estimating value by analyzing the income a property generates or could generate; includes GRM/GIM and capitalization techniques.

Gross Rent Multiplier (GRM)

Factor derived from dividing a comparable’s sale price by its gross monthly rent; multiplied by subject’s rent to estimate value for 1–4 unit properties.

Gross Income Multiplier (GIM)

Similar to GRM but uses annual gross income from all sources (rent plus other income) to value property.

Direct Capitalization Rate (Cap Rate)

Rate of return used to convert annual net operating income into a value indication for commercial or investment property.

IRV Formula

Income ÷ Rate = Value (or any algebraic rearrangement); fundamental calculation in the capitalization method.

Net Operating Income (NOI)

Annual income remaining after deducting vacancies and operating expenses, but before debt service and depreciation.

Potential Gross Income (PGI)

Income a property could produce with 100 % occupancy and full rent collection.

Effective Gross Income (EGI)

PGI minus estimated vacancy and collection losses.

Operating Expenses

Day-to-day costs necessary to operate an income property, excluding debt service and depreciation.

Fixed Expenses

Operating costs that do not vary with occupancy, such as property taxes and insurance.

Variable Expenses

Operating costs that fluctuate with occupancy levels, such as utilities or maintenance.

Reserves for Replacement

Funds set aside periodically to cover future replacement of major items like roofs or HVAC systems.

Debt Service

Periodic payments of principal and interest made to amortize a loan.

Amenity

Any tangible or intangible feature that enhances real estate desirability, such as a pool or scenic view.

Arm’s Length Transaction

Sale conducted under typical market conditions where buyer and seller act in their own best interests without undue pressure.

Reconciliation

Final appraisal step of analyzing and weighing results from different valuation approaches to arrive at a single value opinion.

Market Rent

Rental amount a property could command in an open market, free of existing leases or concessions.

Subject Property

Property being appraised or evaluated for an estimate of value.