Appraisal Glossary
Mortgage Constant
A component of the capitalization rate derivation, it is the quotient of the total annual debt payments on a mortgage divided by that mortgage's original balance. It is sometimes referred to as the loan constant.
Discounting
A concept of time preference that holds that future income or benefits are worth less than the same income or benefits received today, and that the value of future income or benefits systematically declines as the time for their receipt is further deferred into the future. In appraisal analysis, discounting is the arithmetic procedure for applying a specified rate derived from the market to the anticipated future income stream in order to develop a present worth estimate.
Marshall & Swift
A guide for developing replacement costs, depreciated values, and insurable values for buildings and improvements, titled Marshall Valuation Service.
Engagement Letter
A letter between a bank and an appraiser that documents the expectations of each party to the appraisal assignment. For example, it may specify, among other items, the property's location and legal description, intended use of the appraisal; the expectation that the appraiser will comply with applicable law, regulations, guidelines, and standards; reporting format; expected delivery date; and appraisal fee.
Evaluation
A limited form of real property valuation that is less in scope than an appraisal. It is required by the Agencies' appraisal regulations for transactions that qualify for the appraisal threshold exemption, business loan exemption or subsequent transaction exemption.
Sales Comparison or Market Approach
A set of procedures through which an appraiser derives a value indication for a property by comparing a property being appraised to similar properties that have been sold recently, then applying appropriate units of comparison and making adjustments to the sale prices of the comparables accordingly. This approach can be used to value improved properties, vacant land, or land being considered as if vacant
Income Approach
A set of procedures through which an appraiser derives a value indication for a property by converting its anticipated benefits (cash flows and reversion) into property value. This conversion can be accomplished by Direct Capitalization and/or Discounted Cash Flow (DCF) Analysis.
Cost Approach
A set of procedures through which an appraiser derives a value indication for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to this fee simple value indication to reflect the value of the property interest being appraised (if different from fee simple).
Foreseeable Future
A time period during which the probability of a future event or series of events happening can be forecast with a reasonable degree of reliability. A reasonably manageable future time period. A forecast is based upon data that are known or knowable at the time it is prepared. A foreseeable future time period (foreseeable future) is therefore the time period in which there is a reasonable degree of certainty that the forecasted future events will occur.
Development Method
A valuation methodology that is frequently used to value raw land intended to be developed as a subdivision or to estimate the prospective market value of any type of proposed development where the finished property will be sold to its ultimate end users or owners, such as a condominium project or time share property. This method is sometimes referred to as the subdivision method or the subdivision analysis method.
Fee Simple Estate or Ownership Right
Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat (the power of a state to acquire title to property for which there is no owner, as in cases where a property owner dies intestate without a valid will or relatives legally entitled to inherit the property).
Disposition Costs
All direct costs incurred as a result of the final disposition of an asset, including but not limited to broker fees and commissions, settlement attorney fees, advertising expenses, title fees, survey fees, deed transfer taxes or stamps, and other miscellaneous fees.
Abundance of Cautiion
An appraisal exemption situation here a lien is taken on real estate, but the extension of credit is well supported by th borrower's documentaed, veified, and reliable cash flow or collateral other than the real property.
Direct Capitalization
An appraisal income approach methodology whereby an estimated value is derived from dividing one year's NOI or cash flow of a property by a capitalization rate.
Discounted Cash Flow (DCF) Analysis
An appraisal income approach methodology whereby the timing and quantity of periodic cash flow and reversion of property value are specified and discounted to a present value at a specified rate.
Bulk or Mass Appraisal
An appraisal of many properties using a more statistical approach. Usually done by government agencies responsible for setting values for property tax calculations.
Appraisal Subcommittee
An independent agency that is a subcommittee of the Federal Financial Institutions Examination Council (FFIEC). All of the agencies and the U.S. Department of Housing and Urban Development (HUD) appoint representatives to the ASC. The ASC conducts on-site reviews of each state appraiser agency once every two years, with more frequent visits to states with weak enforcement programs. The ASC has the authority to disapprove a state appraiser regulatory program. Disapproval disqualifies the appraisers in that state from conducting appraisals for federally insured institutions. Each state certified or licensed appraiser pays $25 each year to support the ASC National Registry. This fee funds the ASC's operations and provides funding for grants to the Appraisal Foundation for its Title XI-related activities, such as updating the USPAP. (www.asc.gov)
Federally Related Transaction
Any real estate-related financial transaction that an agency engages in, contracts for, or regulates and that requires the services of an appraiser.
Exposure Time
As defined in USPAP, a reasonable length of time that the property would have been offered on the market prior to the hypothetical consummation of sale on the appraisal's effective date. Exposure time is always presumed to precede the effective date of the appraisal.
Real Estate-Related Financial Transaction
As defined in the Agencies' appraisal regulations, any transaction involving the sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof; the refinancing of real property or interests in real property; or the use of real property or interests in property as security for a loan or investment, including mortgage-backed securities.
Market Value
As defined in the Agencies' appraisal regulations, the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this deflation is consummation of a sale as of a specified date and passing of title from seller to buyer under conditions whereby buyer and seller are typically motivated; both parties are well informed or well advised, and acting in what they consider their own best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and the price represents normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Appraisal
As defined in the Agencies' regulations, a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion as to the market value of an adequately described property as of a specific date(s), supported by the presentation and analysis of relevant market information
Holding Period
As used by an appraiser, it is the expected term of ownership of an investment. It extends from either the date when an investment in real estate is expected to occur or from the present date, if the ownership position currently exists, until the date when the investment and ownership position would normally be terminated through disposition by a long-term investor.
Obsolescence
Decline in perceived value of asset, frequently because of technological innovations, changes in an industry's processes, or changes required by law. In appraisal terms it includes functional, economic, locational, environmental, or physical obsolescence of a real property. Within the cost approach to value, these obsolescence or depreciation factors are considered in reaching the value opinion.
Appraisal Foundation
Established on November 30, 1987 by nine professional appraisal organizations in the US and Canada as a not-for-profit corporation under the laws of Illinois. Its purpose was to implement and maintain USPAP. (www.appraisalfoundation.org)
Net Operating Income (NOI)
Income generated by an income-producing property after payment of all property-related expenses, but before debt service. Costs do not include depreciation, capital expenditures, or expenses not related to real estate.
Holding Costs
Real estate taxes, insurance, maintenance and repairs, management, and other direct costs expended during the period of time when a property is held.
Market Rent
Rental income a property would command in the open market based upon the highest and best use of the property.
Depreciation
See Obsolescence
"As Completed" Market Vaule
See Prospective Market Value
"As Stabilized" Market Value
See Prospective Market Value
Economic Feasibility
The ability to recover the cost of an economic activity through future economic benefits directly related to the activity. The economic cost of an activity is the market price of expenditures for land, labor, capital, and entrepreneurial reward, which are incidental to the activity. In the context of real estate projects that are proposed, under construction, or under conversion to a new use, the test of economic feasibility would be a comparison of the total cost of production to the prospective market value "As Stabilized" or "As Completed." When the prospective market value at either of these two points in time is equal to or greater than the cost associated with achieving either stabilized occupancy or completion of construction, the project might be considered to be economically feasible.
Absorption Period
The actual or expected period of time required from the point when a property is initially offered for purchase or use (rental by its ultimate users until all portions offered for sale have been disposed of or stabilized occupancy has been achieved.
Scope of Work
The amount and type of information researched and the analysis applied in an appraisal assignment. Scope of work includes, but is not limited to the degree to which the property is inspected or identified, the extent of research into physical or economic factors that could affect the property, the extent of data research, and the type and extent of analysis applied to arrive at opinions or conclusions
Absorption Rate
The amount of additional new unites that are in demand and can be assimilated by a given geographic area through purchase or use (rental) by its ultimate users during a specified time period.
Discount Rate
The annual percentage rate that reflects the competitive rate of return on an investment with similar risk, liquidity, and financial characteristics. It is synonymous with an internal rate of return that mathematically equates the present value of a series of future cash flows to their present worth. It is a blended rate that reflects the market rate of interest available to a borrower from a lending institution; the market rate of return required by an equity investor in a project or property with similar risk, liquidity, and financial characteristics; and the expected entrepreneurial profit to be derived from the operation or development of a property (unless the profit is deducted as a line item in the expense statement).
Internal Rate of Return
The annualized rate of return on capital that is generated or is capable of being generated by an investment during the period of ownership. It is that rate that mathematically equates the expected future cash flows or receipts from an investment with either their present value or initial cost.
Overall Rate (OAR)
The capitalization rate applied in the appraisal analysis, based on rates derived from comparable sales, investor surveys, bands of investment (or mortgage/equity method), and DSC ratios.
Reversion
The estimate of the eventual proceeds of resale at the termination of an investment.
"As Is" Market Vaule
The estimate of the market value of real property in its current physical condition, use, and zoning as of the appraisal date.
Gross Selling Price
The expected total purchase price exchanged by a single purchaser or group of purchasers for an interest in an identified parcel of real estate. While gross selling price normally contemplates a specific transaction date, it frequently is used to identify the gross amount of consideration paid in a series of transactions over time, such as in the sale of condominium units or subdivision lots over time. See also Sum of Retail Sales.
Leasehold Interest or Ownership Right
The interest held by the lessee (the tenant or renter) through a lease transferring the rights of use and occupancy for a stated term under certain conditions.
Reconciliation of Value
The last phase of any valuation assignment in which two or more value indications derived from market data are resolved into a final value opinion, which may be either a final range of value or a single point estimate.
Present Value
The lump sum amount that represents the current value of the right to collect future payments.
Leased Fee Interest or Ownership Rigt
The ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and the lessee are specified by contract terms contained within the lease.
Economic Life
The period over which improvements to real property contribute to property value. Sometimes also referred to as economic useful life.
Capitalization (Cap) Rate
The rate at which a stream of periodic payments converts to a fixed amount of capital. It is intended to represent the overall, pretax, unleveraged return expected by investors from a particular property based on the information available at that specific point in time.
Highest and Best Use
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.
Agencies
The term used in various appraisal regulations to define the federal agencies that have jointly issued the regulations, including the Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (FRB); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); and National Credit Union Administration (NCUA).
Prospective Market Value "As Completed" and "As Stabilized"
This methodology may be appropriate for the valuation of a property interest related to a credit decision for a proposed development or renovation project. According to USPAP, an appraisal with a prospective market value reflects an effective date that is subsequent to the date of the appraisal report. Prospective value opinions an intended to reflect the current expectations and perceptions of market participants, based on available data. Two prospective value opinions may be required to reflect the time frame during which development, construction and occupancy will occur: (1) The prospective market value "as completed" reflects the property's market value as of the time that development is expected to be completed. (2) The prospective market value "as stabilized" reflects the property's market value as of the time the property is projected to achieve stabilized occupancy. See also Stabilized Occupancy.
Effective Date
USPAP requires that each appraisal report specify the effective date of the appraisal and the date of the report. The date of the report indicates the perspective from which the appraiser is examining the market. The effective date of the appraisal establishes the context for the value opinion, since it is the date at which the analyses and opinions apply. Three categories of effective dates—retrospective, current, or prospective—may be used, according to the intended use of the appraisal assignment.