Key Terms - Chapter 13

Question 1

anticipation

Answer 1

In valuing property, value based on the present value of anticipated future benefits of ownership.

Question 2

appraisal

Answer 2

An estimate of property value based on factual data.

Question 3

broker price opinion (BPO)

Answer 3

Presentation and analysis of the competition in the marketplace for a particular property for the purpose of arriving at a market price or listing price. Also referred to as a Comparable Market Analysis (CMA).

Question 4

capitalization

Answer 4

The process of converting future income into an indication of the present value of a property by applying a capitalization rate to net annual income.

Question 5

capitalization formula

Answer 5

Investment or value of real estate times the capitalization rate equals the annual net income of the real estate.

Question 6

cash flow

Answer 6

Regular income produced by a rental property after deducting operating expenses and debt service.

Question 7

chronological age

Answer 7

Actual age of a structure.

Question 8

comparable

Answer 8

A property that is similar to a property being appraised by the direct sales comparison approach.

Question 9

comparative market analysis (CMA)

Answer 9

Presentation and analysis of the competition in the marketplace for a particular property for the purpose of arriving at a market price or listing price. Also referred to as a Broker Price Opinion (BPO).

Question 10

competition

Answer 10

The principle stating that when the net profit generated by a property is excessive, the result will be to create very strong competition.

Question 11

conformity

Answer 11

The homogeneous uses of land within a given area, which results in maximizing land value.

Question 12

contribution

Answer 12

The principle that for any given part of a property, its value is the result of the contribution that part makes to the total value by being present or the amount that it subtracts from total value as a result of its absence.

Question 13

cost

Answer 13

A measure of expenditure of labor and material made sometime in the past.

Question 14

cost approach

Answer 14

An appraisal method whereby the cost of constructing a substitute structure is calculated, depreciation is deducted, and land value is added.

Question 15

curable

Answer 15

A condition of property that exists when correction is physically possible and the cost of correction is less than the value increase.

Question 16

debt service

Answer 16

Principal and interest payments on a debt.

Question 17

demand

Answer 17

A desire or need for a property that is coupled with the financial ability to satisfy the need

Question 18

depreciation

Answer 18

Loss in value from any cause.

Question 19

economic obsolescence

Answer 19

A loss in value caused by such things as changes in surrounding land use patterns and failure to adhere to the principle of highest and best use. Always associated with things located outside the boundaries of the property.

Question 20

effective age

Answer 20

The age of a property as it appears to be based on its appearances.

Question 21

effective demand

Answer 21

A desire for property accompanied by the financial ability to satisfy the desire by purchasing the property.

Question 22

functional obsolescence

Answer 22

A loss in value resulting from such things as faulty design, inadequacies, overadequacies, and out-of-date equipment.

Question 23

gross effective income

Answer 23

Gross potential income less deductions for vacancy and credit losses plus other income.

Question 24

income (capitalization) approach

Answer 24

The primary method of estimating the value of properties that produce rental income. Also called appraisal by capitalization.

Question 25

incurable

Answer 25

That which is not physically correctable or not economically practical to correct.

Question 26

market value

Answer 26

The value in terms of money agreed upon by a willing buyer and seller, neither being under undue pressure and each being knowledgeable of market conditions at the time.

Question 27

net operating income

Answer 27

Gross operating income minus operating expenses.

Question 28

operating expenses

Answer 28

The costs of operating a property held as an investment.

Question 29

physical deterioration

Answer 29

A loss in value caused by unrepaired damage or inadequate maintenance.

Question 30

potential gross income

Answer 30

The income that would be produced if all units were rented 100% of the time

Question 31

price

Answer 31

The amount of money paid for a property

Question 32

probable sales price

Answer 32

Estimating price of property being listed.

Question 33

quantity survey method

Answer 33

A method for estimating replacement or reproduction cost

Question 34

replacement cost

Answer 34

The amount of money required to replace a structure with another structure of comparable utility.

Question 35

replacement reserve

Answer 35

A fund to replace assets when they wear out.

Question 36

reproduction cost

Answer 36

The amount of money required to build an exact duplicate of a structure.

Question 37

scarcity

Answer 37

A short supply in comparison with demand.

Question 38

square-foot method

Answer 38

A technique to estimate the total cost of construction in which the total number of square feet to be constructed is multiplied by a cost per square foot to derive total cost.

Question 39

substitution

Answer 39

The principle providing that the highest value of a property has a tendency to be established by the cost of purchasing or constructing another property of equal utility and desirability, provided the substitution could be made without unusual delay.

Question 40

supply and demand

Answer 40

The principle stating that the greater the supply of any commodity in comparison to demand, the lower the value. Conversely, the smaller the supply and the greater the demand, the higher the value.

Question 41

transferability

Answer 41

The ability to transfer property ownership from seller to buyer.

Question 42

unit-in-place method

Answer 42

The technique used in appraising real estate under the cost approach, in which the cost of replacement or reproduction is grouped by stages of construction.

Question 43

utility

Answer 43

Capable of serving a useful purpose.

Question 44

value

Answer 44

The amount of money (or goods) considered of equal worth to the subject property. There are many types of value, e.g., market value, book value, assessed value, and so on.

Question 45

value in use

Answer 45

A subjective value that is not market value, derived from the usefulness of the property.