Unit 16: Real Estate Appraisal

Accrued Depreciation

Loss in property value due to physical deterioration, external depreciation, and functional obsolescence.

Anticipation

The appraisal principle 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 professional trained to provide an unbiased opinion of value.

Appraiser Independence Requirements (AIR)

Regulations issued by Fannie Mae that must be followed by appraisers to ensure accurate and objective appraisals.

Assemblage

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

Broker's Price Opinion (BPO)

An opinion of real estate value commissioned by a bank or an attorney and provided by a broker.

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.

Competition

The appraisal principle stating that excess profits generate competition.

Comparables

Properties used in an appraisal report that are substantially equivalent to the subject property.

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 stating that the value of any component of a property is what it gives to the value of the whole or what its absence detracts from that 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, a loss of value in property due to any cause, including physical deterioration, functional obsolescence, and external obsolescence. (2) In real estate investment, a deduction for tax purposes taken over the period of ownership of income property, based on the property's acquisition cost.

Economic Life

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

External depreciation

Reduction in a property's value caused by outside factors (i.e., those that are off the property).

External Obsolescence

Incurable depreciation caused by factors not on the subject property, such as environmental or economic factors.

Functional Obsolescence

A loss of value to an improvement to real estate arising from problems of design or utility.

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; usually used for commercial property.

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; usually used for single-family residential property.

Highest and Best Use

The legally permitted and physically 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.

Law of Diminishing Returns

Point at which additional property improvements do not increase the property's income or value.

Law of Increasing Returns

Applies as long as money being spent on property improvements produces an increase in the property's income or value.

Market Data Approach

Also known as the sales comparison approach. An estimate of value obtained by comparing property being appraised with recently sold comparable properties.

Market Value

The most probable price that a 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 anticipated vacancy and collection losses and operating expenses.

Obsolescence

The loss of value due to property features that are outmoded or less useful. Obsolescence may be functional or external.

Physical Deterioration

A reduction in a property's value resulting from a decline in physical condition; can be caused by action 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 into one larger lot.

Progression

An appraisal principle that the value of a lesser-quality property is favorably affected by the presence of a better-quality property.

Regression

An appraisal principle that the value of a better-quality property is affected adversely by the presence of a lesser-quality property.

Reconciliation

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

Sales Comparison Approach

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

Straight-line depreciation

Depreciation taken periodically in equal amounts over an asset's useful life.

Substitution

An appraisal principle 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 with any other commodity.

Uniform Standards of Professional Appraisal Practice (USPAP)

A set of standards developed by the Appraisal Foundation that details information required for a property appraisal.

Value

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