Appraisal terms and concepts for the MN Appraiser Licensing Exam
An economic theory that says value is created by the expectation of future benefits, such as profit, pleasure, tax shelter, production, income, etc. Anticipation is the foundation for the income approach.
Other appraisers with expertise and competency in a similar type of assignment.
That which is taken to be true.
A condition that exists in the real estate market when there are slightly more homes available than buyers.
A situation in the real estate market in which buyers have a large selection of properties from which to choose.
A principle affecting value in real estate that says all factors that influence real estate - physical, economic, governmental, and social - are constantly changing, and, thus, property value itself is subject to constant change.
Characteristics of Value
Also known as D-U-S-T. The characteristics of value are Demand, Utility, Scarcity, and Transferability.
The party (or parties) who engage an appraiser (by employment or contract) in a specific assignment.
Two or more parties, properties, etc., trying to obtain the same thing.
The theory that says a particular property achieves its maximum value when it is surrounded by properties that are similar in style, function, and utility. Also called Homogeneity.
The theory that a particular item or feature of a property is worth only what it actually contributes in value to that parcel of real estate.
Worthy of belief.
Date of Report
An indication of the perspective from which the appraiser is examining the market.
Establishes the context for the value opinion.
An assumption directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions of conclusions.
Information that covers the forces that affect property values, but are not directly related to a particular piece of property. General data covers physical econcomic, governmental, and social factors (PEGS) and can be local or national.
Highest and Best Use
The most profitable, legally permitted, economically feasible, and physically possible use of a piece of property.
That which is contrary to what exists, but is supposed for the purpose of analysis.
The use or uses of an appraiser's reported appraisal, appraisal review, or appraisal consulting assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.
The client and any other party as identified, by name or type, as users of the appraisal, appraisal review, or appraisal consulting report by the appraiser on the basis of communication with the client at the time of the assignment.
An assignment condition that voids the force of a part or parts of USPAP, when compliance with part or parts of USPAP is contrary to law or public policy applicable to the assignment.
Statement by the appraiser explaining the framework used to reach the appraisal value.
Data that is obtained directly by the appraiser.
Principle of Consistent Use
Holds that land cannot be valued for one use, while the improvements are valued at another use.
A principle that says the value of a home is positively affected by the other homes in an area. Usually said about the "worst" home in the "best" area.
A principle that says the value of a home is negatively affected by the other homes in an area. Usually said about the "best" home in the "worst" area.
Scope of Work
The type and extent of research and analysis in an assignment.
Data that is compiled by other parties and used by the appraiser.
A situation in the real estate market where sellers can choose from a large number of buyers looking for property in an area.
Information that is relevant to the subject property. There are two types of specific data.
Theory that an informed buyer will not pay more for a home than a comparable substitute.
Possesses many of the same appeal factors, but the buyer for one property may not necessarily be interested in the comparable property.
Those that compete head to head. A potential buyer for one property would also be interested in the competitive property.
The third stage a neighborhood goes through in its life cycle, when property values begin to fall as demand falls.
An instrument that conveys the grantor's interest in real property.
The narrowest of definitions of a market area. A district is an area consisting of one particular land use, such as multi-family residential, commercial, industrial, etc.
When a building has the adequate design and features to be used as inteded.
The process of rapid revitalization of properties in a neighborhood, which causes current residents to be displaced.
The first stage a neighborhood goes through in its life cycle, when property values rise as development activity begins and continues.
The broadest of all terms identifying the boundaries of a particular area. Market area takes into account the land uses and characteristics of typical market participants within the defined area.
Any constant, contiguous area that may be identified by similar characteristics of physical boundaries.
The final stage a neighborhood goes through in its life cycle, when property values rise again as demand increases, resulting in increased renovation and rehabilitation. See: Gentrification.
The second stage a neighborhood goes through in its life cycle, when the area is built up to the point where there is little, if any, vacant property. Also called equilibrium.
The documentation necessary to support the appraiser's analyses, opinions, and conclusions.
A process in which an appraiser identifies a probable value range, most often by identifying values of properties that are inferior and those that are superior. The appraiser then determines where an opinion of value for the subject should fall within that range.
Conditions of Sale
Atypical motivations of the parties of a transaction (usually makes the sale non-arm's length).
An amount paid to a lender (1% of loan amount) when a loan is made to make up the difference between the current market interest rate and the rate a lender give a borrower on a note. Discount points increase a lender's yield on a note, allowing the lender to give a borrower a lower interest rate.
Elements of Comparison
Characteristics of a property or a transaction that can be used to explain differences in the price paid in a transaction.
A site that is not needed to support the existing improvements or highest and best use. Could have sell-off potential or be needed for future expansion of the exisiting or anticipated improvements.
The overall total of all adjustments applied regardless of whether the adjustment is applied as a positive or a negative.
The proximity of property to common destinations and conveniences, and the time required to reach those places.
The sum of the adjustments taking into account whether the adjustment was a positive or a negative.
Paired Data Analysis
The process of determining the value of specific property characteristics or features by comparing pairs of similar properties. Also called Matched Pair Analysis.
Any interest in real estate that one may have, other than the full bundle of rights.
A method used after any quantitative adjustments have been applied that employs the appraiser's judgement in forming opinions relying on such methods as relative comparison analysis (bracketing), ranking analysis, and/or personal interviews. The method requires good judgement and reasoning skills of the appraiser.
A method that requires the recognition of the differences between the comparable data and the subject property and assigning either a market derived dollar or percentage amount as an adjustment.
Analyzing the values derived from the different appraisal approaches to arrive at a final opinion of value.
A statistical measure that attempts to ascertain the source of change in variables.
Graphs used to study the relationship between two variables.
A site that is not needed for the highest and best use of the subject and does not have potential for sell-off or an autonomous highest and best use.
Unit of Comparison
A component with which a property can be divided for the purpose of comparison such as a square foot, living unit, etc.
Elimination of a debt with a series of equal payments (principle and interest) at regular time intervals.
Interest paid on previously earned interest based on the original principal amount. The more frequent the compounding period and the higher the effective interest rate, the greater the impact on the calculation.
The process, by some investors, that uses the principles of TVM to convert future income or cash flows into present value, at a specified interest rate.
Amount of money that an investment (either a single payment or an annuity) at a fixed interest rate, for a specified period of time, will grow to in the future.
An amount today that is equivalent to a future payment, or series of payments (annuity), based on a specified interest rate, for a specific period of time.
Reverse Polish Notation (RPN)
A formal logic system used in the HP 12c calculator that allows mathematical equations to be expressed by pressing the arithmetic operations key (+, -, etc.) after the numbers, or variables have been keyed.
Sinking Fund Factor
Amount set aside on a periodic basis so that, when compounded at a given interest rate for a defined term, it will accumulate to a specified future sum.
Time Value of Money (TVM)
The concept that a dollar today is usually worth more than receiving a dollar at some point in the future.
What tenants are actually paying in rent, as stated in the terms of the lease.
The amount of funds required to make periodic payments of principal and interest to the lender.
The resulting difference when the market rent exceeds the contract rent.
Effective Gross Income (EGI)
Potential gross income, less vacancy and collection losses.
The resulting difference when the contract rent exceeds the market rent.
The greatest estate (ownership) one can have in real property; it is freely transferable and inheritable, and of indefinite duration, with no conditions on the title. Often called fee simple absolute or fee title.
Ongoing operating expenses that do not vary based on occupancy levels of the property (e.g., taxes and insurance). Compare: Variable Expenses.
Gross Income Multiplier (GIM)
A factor that takes into account income derived from all sources of a property (e.g., vending, storage units).
A property lease for which the landlord pays all expenses related to the operation of the property.
Gross Rent Multiplier (GRM)
A factor derived from comparable rental data, which is then used to develop an opinion of value of the subject property.
Conveyance of a leasehold estate from the fee owner to a tenant; a contract for which one party pays the other rent in exchange for possession of real estate.
Leased Fee Estate
The landlord's ownership interest in property.
An estate that gives the holder (tenant) a temporary right to possession, without title. Also called Less-than-Freehold Estate.
A person who leases property; a tenant.
A person who leases property to another; a landlord.
What the property could rent for in the open market if currently vacant and available.
A property lease for which the tenant pays all utilities and certain expenses, in addition to rent payments.
Net Operating Income (NOI)
Income after expenses.
Day-to-day costs of running a building, like repairs and maintenance, but not including debt service or depreciation.
A percentage of business sales a tenant's business has generated, paid in addition to rent payments.
Overall Capitalization Rate
Used to interpret a property's single year net operating income to the property's value using direct capitalization.
Overall Yield Rate
Considers a series of annual figures over the entire investment period as well as reversion.
Potential Gross Income (PGI)
The income that could be produced by a property in an ideal situation, with no vacancy or collection losses.
Reserves for Replacement
An amount of money set aside for future replacement of major items, such as the roof or heating system. Also called Reserves.
Typically a sum, often stated in a dollar amount, that a property owner will receive when or if he sells the property at the end of the investment term.
Operating expenses necessary to the property, but usually dependent on the property's occupancy level.
Band of Investment
A technique for determining an overall capitalization rate by weighting and combining the various components of an investment.
An income method that takes a property's single-year net operating income or NOI into a value indication by applying an overall capitalization rate: NOI/Overall Capitalization Rate = Value.
A factor derived and applied using EGI - the amount after estimating vacancy has been deducted from PGI.
Equity Capitalization Rate
The capitalization rate applied to the expectation of return on equity.
A formula or technique that derives an overall capitalization rate: Income (NOI)/Value (Sale Price) = Rate
Mortgage Capitalization Rate
A return on the money lent in an investment.
The ratio between annual debt service and loan principal.
A factor that is derived from market data and applied to the subject's market rent or income to produce a value indication in an income approach.
A fund factor derived from, and applied to, the total gross income generated by the property without vacancy being considered.
Briefly details the unit information, such as lease terms, contract rent, as well as the effective date of the leases that are in place for the property.
A compilation of the rents being generated (and often rent history) in a particular market for a particular property type.
A formula used to derive the appropriate multiplier from the transaction data: Value (Sale Price)/Income (Gross Monthly Rent) = Muliplier.
Rights that go with ownership of real property. They are usually transferred with the property, but may be sold separately. This is a legal term referring to both physical and non-physical appurtenances.
A property that benefits from an easement.
A right to use some part of another person's real property for a particular purpose. An easement is irrevocable and creates an interest in the property.
An easement that burdens one piece of land for the benefit of another.
Easement in Gross
An easement that benefits a person instead of a particular property; there is a dominant tenant, but no dominant tenement.
Leased Fee Interest
Defined by the amount of contract rent over and above market rent.
Defined by the amount of rent that is less than market rent (amount of difference between contract and market rent).
A freehold estate that lasts only as long as a specified person lives.
Someone who owns a life estate; the person entitled to possession of the property during the measuring life.
When contract rent is more than market rent (an advantage to the lessor).
When contract rent is less than market rent (an advantage to the lessee).
The party in a life estate who is entitled to the remainder of the property interest after the life estate is terminated.
A property that is burdened by an easement.
Grant the right to use (or possess) a property for a specified period of time (the right may or may not be accompanied with an ownership interest in the property).