Texas Principles of Real Estate - Part 2
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 achieved when the improvements on a site produce the highest (net) return, commensurate with the investment.
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.
Gross rent multiplier
A number which, times the gross income of a property, produces an estimate of value of the property.
Assessed Value
A valuation placed upon a piece of property by a public authority as a basis for levying taxes on the property.
Principle of Substitution
Affirms that the maximum value of a property tends to be set by the cost of acquiring an equally desirable and value substitute property, assuming no costly delay is encountered in making the substitution
Principle of Anticipation
Affirms that value is created by anticipated benefits to be derived in the future.
Comparative Market Analysis
An analysis of the competition in the marketplace that a property will face upon sale attempts.
Appraisal
An estimate of the value of property resulting from an analysis of facts about the property.
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 Competition
Holds that profits tend to breed competition and excess profits tend to breed ruinous completion.
Principle of Conformity
Holds that the maximum value is realized when a reasonable degree of homogeneity of improvements is present.
Physical Deterioration
Impairment of condition. Loss in value brought about by wear and tear, disintegration, use and actions of the elements; termed curable and incurable.
Depreciation
Loss of value of property brought about by age, physical deterioration or functional or economic obsolescence
Sales Comparison Approach (Market Data Approach)
One of the three methods in the appraisal process. A means of comparing similar type properties, which have recently sold, to the subject property. Commonly used in comparing residential properties.
Cost Approach
One of the 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.
Income Approach
One of the three methods of the appraisal process generally applied to income producing property, and involves a three-step process1) Find net annual income2) Set an appropriate capitalization rate or "present worth" factor3) Capitalize the income dividing the net income by the capitalization rate
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.
Value
Present worth of future benefits arising out of ownership to typical users/investors.
Utility
The capacity to satisfy human needs and desires.
Insured Value
The cost of replacing a structure completely destroyed by an insured hazard.
Reproduction Cost
The cost of replacing the subject improvement with one that is the exact replica, having the same quality of workmanship, design and layout, or cost to duplicate an asset.
Replacement Cost
The cost to replace a structure with one having utility equivalent to that being appraised, but constructed with modern materials and according to current standards, design and layout.
Book Value
The current value for accounting purposes of an asset expressed as original cost plus capital additions minus accumulated depreciation.
Effective Demand
The desire for possession or ownership backed by the financial means to satisfy that need.
Market Value
The highest price in terms of money which a property will bring in competitive and open market and under all conditions required for a fair sale, i.e., the buyer and seller acting prudently, knowledgeably and neither affected by undue pressures.
Principle of Externalities
The influences outside of a property can have a positive or negative affect on its value.
Amortization
The liquidation of a financial obligation on an installment basis; also, recovery over a period of cost or value.
Highest and Best Use
The most probable use to which a property is suited that results in its highest value or highest returns to the land.
Economic Life
The period over which a property will yield a return on the investment over and above the economic or ground rent due to land.
Market Price
The price paid regardless of pressures, motives or intelligence.
Supply and Demand
The principle that states the value of a property will increase if the supply decreases and the demand will either increase or remains constant, and visa versa.
Transferability
The relative ease with which ownership rights are transferred from one person to another.
Scarcity
The supply of property in relation to effective demand.
