Anticipation
Principal applied in an appraisal that the value of a property includes some "anticipation" or expectation of future events, good or bad.
Cost Approach
Method of property valuation based upon the lot value, plus cost of new improvements less depreciation. (Most useful for special purpose buildings or historic properties and determining adequate insurance levels).
Appraiser
Licensed professional that applies accepted and approved principals and methodology to estimate the market value or replacement cost of real property and improvements.
Economic Life
The expected useful life of an improvement.
Assemblage
The act of assembling or combining multiple parcels under one ownership and control.
Functional Obsolescence
Form of depreciation applied in appraisals. Addresses issues such as poor or outdated floor plans, or lack of improvements expected in today's market. (i.e. A 5 bedroom home with only 1 bath suffers from functional obsolescence).
Conformity
Appraisal theory suggesting that property values, particularly in residential areas, are maximized when the size, style and appearance of improvements are within a given range.
Highest and Best Use
Statement included in appraisals indicating the use that would maximize value. Use must be feasible and legal but not necessarily the properties current use. Appraisers must state the "highest and best use" in each appraisal.
Market Value
Estimate of a property's sale price under normal, open and fair market conditions.
Square-foot Method
Method of estimating the cost of new improvements, by taking the known construction cost per square foot of comparable properties and applying it to the subject property. (Used in the cost approach to appraisal).
Progression
The positive effect that better properties have on the market value of lesser properties.
Regression
The negative effect that lesser properties have on the market value of better properties.
Capitalization Rate
AKA Cap Rate Rate of return that a commercial property's net operating income generates as a percentage of its value.
Reproduction Cost
Estimated cost to reproduce an exact duplicate of a subject property's improvements. (Useful in determining adequate insurance coverage of historical properties).
Contribution
Appraisal concept that no one part or improvement to a property can be accurately valued without considering its effect on the value of the property as a whole. (i.e. "It may be a nice pool, but does it add to the property's overall value?").
Income Approach
Method of property valuation based on the property's ability to generate income. (Net operating income divided by the desired cap rate equals the property's indicated value under the income approach).
Depreciation
A loss in value due to any cause.
Physical Deterioration
Type of depreciation to real property due to wear and tear, time and the elements, or deferred maintenance.
External Obsolescence
AKA economic obsolescence Type of depreciation due to forces outside of or "external" to the subject property. (i.e. Properties adjacent to landfills suffer from external obsolescence).
Plottage
Profit, or increase in value due to assemblage of multiple parcels.
Gross Rent Multiplier
Multiple of known sales prices to known monthly rents. Sales price divided by gross monthly rent equals GRM. Investors can apply the average GRM in an area to a subject property's expected rent to determine value.
Replacement Cost
Estimate of current construction cost for like improvements to the subject property but not necessarily an exact duplicate.
Sales Comparison Approach
AKA Market Data Approach Appraisal method that adjusts the known market price of "comps" for differences between them and the subject property. Most reliable method for valuing residential property.
Substitution
Appraisal principal that recognizes competition. Regardless of the desirability of a subject property, the market will substitute lesser properties when they are perceived to be a better value.
Quantity-survey Method
The most detailed method of estimating construction costs in the "cost approach" of appraisal. Considers the exact quantity of all materials as well as historic accuracy. Used primarily to determine the reproduction cost for historic properties.
Unit-In-Place Method
Method of estimating construction costs by line item, used in the "cost approach" of appraisal. Thorough, but not as detailed as the "quantity survey method."