chapter 10

Principle of Contribution

A component part of a property is valued in proportion to its contribution to the value of the whole. Holds that maximum values are achiever when the improvements on a site produce the highest (net) return, commensurate with the investment.

Scarcity

A lack of supply

Principle of Substitution

Affirms that the maximum value of a property tends to be set by the cost of acquiring an equally desirable and valuable substitute property, assuming no costly delay is encountered in making the substitution.

Remaining Economic Life

Equals the economic life minus the effective age.

Sales Comparison Approach

One of the three major valuation methods, which compares a subject property's characteristics with those of comparable properties which have recently sold in similar transactions.

Value

Present worth of future benefits arising out of ownership to typical users/investors.

Chronological Age

The actual age of a building.

Federal Funds Rate

The rate at which member banks charge each other for borrowing short-term money.

Capitalization Rate

The rate of interest which is considered a reasonable return on the investment, and used in the process of determining value based upon net income. Capitalization Rate = NOI / Purchase Price

Demand

The supply of willing and able buyers in the marketplace or lack thereof.

Fair Market Value (FMV)

This is the amount of money that would be paid for a property offered on the open market for a reasonable period of time with both buyer and seller knowing all the uses to which the property could be put and with neither party being under pressure to buy or sell.

Gross Income

Total income from property before any expenses are deducted.

Under-Improvement

An improvement which, because of its deficiency in size or cost, is not the highest and best use of the site.

Income Approach

One of the three methods of the appraisal process generally applied to income producing property, and involves a three-step process - (1) find net annual income, (2) set an appropriate capitalization rate or "present worth" factor, and (3) capitalize the income dividing the net income by the capitalization rate.

Cost Approach

One of three methods in the appraisal process. An analysis in which a value estimate of a property is derived by estimating the replacement cost of the improvements, deducting therefrom the estimated accrued depreciation, then adding the market value of the land.

Law of Progression

The worth of a lesser valued residence tends to be enhanced by association with higher valued residences in the same area.

Subjective Value

What something is worth to an individual person without regard to market conditions.

Effective Age

The The conditional age of a building.

Physical Obsolescence

The loss in value due to the actual wearing out of the improvements.

Principle of Change

Holds that it is the future, not the past, which is of prime importance in estimating value. Change is largely the result of cause and effect.

Principle of Conformity

Holds that the maximum of value is realized when a reasonable degree of homogeneity of improvements is present. Use conformity is desirable, creating and maintaining higher values.

Discount Rate

The minimum interest rate set by the Federal Reserve for lending to other banks.

Objective Value

What something is worth when there is a reasonably prudent seller and a reasonably prudent, willing and able buyer, and all else remains equal without coercion and transacted at arm's length.

Economic Life

The amount of years a building can produce an income.

Principle of Anticipation

Affirms that value is created by anticipated benefits to be derived in the future.

Effective Gross Income

The amount of income produced by a piece of property, plus miscellaneous income, less vacancy costs and collection losses.

Principle of Conformity

Value is created when properties tend to be similar in a particular neighborhood.

Over-Improvement

An improvement which is not the highest and best use for the site on which it is placed by reason of excess size and cost.

Principle of Supply and Demand

In appraising, a valuation principle stating that market value is affected by the intersection of supply and demand forces in the market as of the appraisal date.

Depreciation

The ability to deduct expenses on improvements made to income producing property.

Net Operating Income

The annual income generated by an income-producing property after taking into account all income collected from operations, and deducing all expenses incurred from operations.

Economic Obsolescence

A loss in value due to factors away from the subject property but adversely affecting the value of the subject property.

Functional Obsolescence

A loss of value due to adverse factors from within the structure which affect the utility of the structure, value and marketability

Utility

The ability to give satisfaction and/or excite desire for possession. An element of value.

Straight Line Depreciation

A method of depreciation under which improvements are depreciated at a constant rate throughout the estimated useful life of the improvement.

Highest and Best Use

An appraisal phrase meaning that use which at the time of an appraisal is most likely to produce the greatest net return to the land and/or buildings over a given period of time; that use which will produce the greatest amount of amenities or profit. This is the starting point for appraisal.

Appraiser

One qualified by education, training and experience who is hired to estimate the value of real and personal property based on experience, judgment, facts, and use of formal appraisal processes.

Appraisal

A written statement, independently and impartially prepared by a qualified appraiser setting forth an opinion in a federally related transaction as to the market value of an adequately described property as of a specific date. It is supported by the presentation and analysis of relevant market information. An estimate of the value of property resulting from an analysis of facts about the property. An opinion of value.

Federal Reserve System

The federal banking system of the United States under the control of central board of governors (Federal Reserve Board) involving a central bank in each of twelve geographical districts with broad powers in controlling credit and the amount of money in circulation.

Law of Regression

Where a property is "over improved" relative to other surrounding properties in the area that are of lesser value.