Chapter 16: Real Estate Appraisal Flashcards Preview

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Flashcards in Chapter 16: Real Estate Appraisal Deck (125)
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An appraisal is an act or process of developing an opinion of value.
An appraisal is numerically expressed as a specific amount (e.g., $100,000), a range of values (e.g., $95,000 to $100,000), or as a relationship to a previous value opinion or benchmark (e.g., “Value is greater than the previous appraised value.” Or “The property is worth at least as much as the amount indicated to facilitate the loan.”).



An appraiser is one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective. An appraiser conducts an analysis and renders an opinion as to the value of real property specified in his or her employment contract. Real property includes the physical land and improvements together with legal rights to own or use the property.

An appraiser is expected to produce opinions and conclusions based on evidence by sufficient research, analysis of information, and data that supports the rational and logic of those opinions and conclusions.

Appraisers are typically paid a fee that is based on the amount of time and the anticipated degree of difficulty not on the basis of the value of the property. Whether performing an appraisal, appraisal review, or appraisal consulting assignment, all appraisers must adhere to the Uniform Standards of Professional Appraisal Practice (USPAP).



Cost is the actual or estimated amount required to create, produce, or obtain a property. It includes labor, materials, financing expense, land, management and overhead, and the contractor’s profit necessary to bring the finished product to the market. Cost may be more than, or less than, the market value of the property.



Price is the amount that is actually paid in a real estate transaction. It is not necessarily the asking amount or amount offered, and may not represent the actual market value of the property. It may be more than, or less than, the market value. Nonetheless, it is the amount that the buyer is willing to pay and the amount the seller is willing to accept.



Value is an opinion of the worth of a property at a given time in accordance with a specific definition of value. It is the monetary relationship between properties and those who buy, sell, or use those properties. There are many types of value, each of which has a different definition. In appraisal practice, value must always be qualified (e.g. market value, liquidation value, or investment value).


The purpose of an appraisal and its function are



Purpose of appraisal

The purpose of an appraisal is to estimate some type of defined value. There are many different types of value, each of which has a definition of its own. Purpose relates to the work the appraiser was retained to perform, that is, to estimate some type of value. Most appraisals are performed to estimate market value.


Intended Use of appraisal

The use or uses of an appraiser’s reported appraisal, opinions and conclusions, or other valuation services by the appraisal client is referred to as its intended use (previously referred to as function in USPAP). For example, the client may use the appraisal to decide whether to sell or not, to buy or not, and at what price. A lender may use the appraisal to decide whether a loan should be made or not by using that property as security.


What four elements interact to create or affect the value of real estate?

1. Demand
2. Utility
3. Scarcity
4. Transferability


Demand (value)

real estate, like any other product or service, has no value unless someone has a need or desire for it. From an economic viewpoint, demand has two components: the desire for the item or service, and the financial ability to pay for it.


Utility (value)

Real estate must serve a purpose or be useful in order to have value.


Scarcity (value)

Real estate that is in short supply relative to the demand for it has value.


Transferability (value)

the ability to convey a marketable title is paramount to the value of real estate. Although a property with a defective title can be conveyed, it is risky and a purchaser may substantially discount the price if they feel they would incur time and expense in curing the defect.


Types of Value

Assessed Value
Insurable Value
Investment Value
Liquidation Value
Market Value
Salvage Value
Plottage Value


Assessed Value

is the value assigned by the property appraiser for ad valorem tax purposes. Generally speaking, properties with a higher assessment should sell for more than properties with lower assessments.


Insurable Value

or insurance value, is the value used by insurance companies as the basis for insurance coverage. Insurable value is often considered to be the replacement or reproduction cost plus allowances for debris removal or demolition and non-insurable items. Insurable value is less than the property’s appraised market value, because it excludes the value of land on which the building stands.


Investment Value

is the value of a particular property to a particular investor. Potential purchasers of income-producing properties commonly request investment value appraisals. Investment value is the highest price an investor will pay for a property and the lowest price the seller will accept. Investment value is the value to a specific individual, while market value is the value in a typical transaction to a typical buyer.


Liquidation Value

is the amount that remains after all assets of a business have been sold in a hurried, but not forced, sale and all liabilities have been paid. It is the value of a failing business that is not expected to continue. It can also be used to estimate the minimum value of a profitable business.


Market Value

is the value to a typical buyer and a typical seller. This is the most common type of value that is estimated by appraisers. The market value of a property is the most probable price at which specified property rights should sell. However, several assumptions are inherent in this definition:
o The property has been exposed to the market for a reasonable time.
o Both buyer and seller are well informed and acting in their own self-interest.
o Neither party is acting under undue duress.
o The seller has the ability to convey a marketable title
o Payment is in cash in U.S. dollars, or terms equivalent to cash.


Salvage Value

is the amount that can be received from the sale of the parts from a demolished structure.


Plottage Value

is the increase in value resulting from an assemblage, or combining, of two or more adjacent parcels of land under one owner. Typically, the value of the whole parcel will be greater than the sum of the individual smaller parcels.



of real property is the net present value (income) which is generated by the property in a certain use for a certain owner. The value-in-use of a property may be higher or lower than market value.


Principles of Values

Appraisal principles are the rules that govern the formation of value and help to explain how and why values change in the market. Appraisers use them to assist in arriving at their value conclusion.
1. Anticipation
2. Change
3. Competition
4. Conformity
5. Contribution
6. Highest & Best Use
7. Progression
8. Regression
9. Substitution



states that the value of a property today is the sum of its future benefits. When a potential buyer considers the purchase of a property, the benefits it will provide during that owner’s period of ownership forms the basis for the decision to buy, and at what price. Value today is measured in terms of future benefits. This principle is particularly visible in the purchase of income-producing real estate where present dollars are paid in exchange for the right to receive future dollars.



states that circumstances can cause changes to occur in the market, which in turn may affect the value of real estate. An appraisal is made as of a specific date in order to take into account the market forces that influence value at that point in time.



recognizes that sellers compete with other sellers, and buyers compete with other buyers. This principle focuses on the effect of changes in supply and demand.



states that the value of a property is sustained when it is in conformity with other properties in the same area. Conformity refers to size, architectural style, and other features.



states that the value of a component of the property is the amount it adds to the total value of the property; in other words, the amount by which the value of the property would decrease by its absence. This principle illustrates the difference between the cost of a component and the value added by the component. Example: a swimming pool may cost $20,000 to install, but it may add only $15,000 to the value of the property.


Highest & Best Use

states that the best use for the property, known as its highest, best, and most profitable use, is that which will most likely produce the greatest net return to the land over a given period-of-time. This net return is realized in terms of money or other amenities.



applies when a lower-priced property is built or an existing property is inadequate (under-improved) in an area that consists of property that is more expensive. The lower-priced property will progress (increase) in value toward the level of the more expensive properties in the area. This principle tends to create price conformity within an area.