Section 16 Vocabulary

Question 1

Appraisal

Answer 1

Appraisal is the process of estimating the value of real estate.

Question 2

Assemblage

Answer 2

Combining of two or more adjoining properties into one.

Question 3

Automated Valuation Models

Answer 3

Many lenders utilize AVMs, or Automated Valuation Models, which is a computer program that will provide a quick synopsis of value.

Question 4

Comparative Market Analysis (CMA)

Answer 4

A Comparative Market Analysis (CMA) is an estimate of value used by sellers to determine the best asking price. It’s used by buyers to determine an appropriate offer to make on a property. CMAs are not appraisal reports, yet they do use some of the same processes.

Question 5

Cost Depreciation Approach

Answer 5

This approach involves finding a similar property, and reproducing the building as closely as possible, then depreciating for age and condition, etc.

Question 6

Depreciation

Answer 6

A lowering in value due to any condition. Also, a write off for taxes.

Question 7

Economic Life

Answer 7

The lifespan that a building is useful. Usually, though not always, dictated by tax law.

Question 8

Federally Related Transaction

Answer 8

Involves federal financial regulatory agency in primary or secondary mortgage market and requires services of a state certified appraiser. Must be written and conform to USPAP. Applies to real estate related loans, sale, lease, exchange, financing, etc. Also includes appraisals for Fannie Mae, Freddie Mac, FHA, and VA.

Question 9

Gross Income Multiplier (GIM)

Answer 9

The ratio between the gross yearly income and its selling price. This ratio is compared to other investment properties to determine selling/buying value.

Question 10

Gross Rent Multiplier (GRM)

Answer 10

The ratio between the monthly income and selling price and is used to compare investment properties.

Question 11

Highest and Best Use

Answer 11

The most probable use of a property that is legally permissible physically, possibly financially, and results in maximum profitability.

Question 12

Income Approach

Answer 12

The income approach method is the third way appraisers use to calculate value. This is used when the property produces income such as with rental units. Bases value on future income generated from the property. Used for income-producing property.

Question 13

Incurable

Answer 13

Property situations that diminish the value of the property and are not fixable at a cost less than the cost of replacement property.

Question 14

Market Value

Answer 14

Market value is the highest price a willing buyer would pay and a willing seller would accept. It assumes that both the buyer and the seller are fully informed and equally motivated. It also assumes that the property has been marketed for sale for a reasonable period of time. Finally, it assumes that the property was not sold under duress such as with a bank foreclosure or auction. The market value may be different from the price a property can actually be sold for at a given time (market price).

Question 15

Over Improvement

Answer 15

A homeowner that continues to improve a property past the maximum value is risking over-improvement of the property.

Question 16

Plottage

Answer 16

Combining of two or more adjoining properties into one. Plottage is the added value that results from the assemblage of those properties.

Question 17

Principle of Substitution

Answer 17

Principle of Substitution states that no prudent person would pay one million dollars when there is another one readily available that has the same use, design and income for five hundred thousand dollars, the lowest price one is preferred.

Question 18

Progression

Answer 18

The value of an inferior property is enhanced by association with superior properties.

Question 19

Reconciliation

Answer 19

An appraiser may choose three comps that the appraiser believes do not equally represent the subject property. If this happens he or she can use a process of applying weighted reconciliation to each home rather than taking a mathematical average.

Question 20

Regression

Answer 20

The value of a superior property is adversely affected by association with inferior properties.

Question 21

Replacement Cost

Answer 21

Building a suitable replacement that will meet the same needs at the same quality but will not be exactly the same.

Question 22

Sales Comparision approach

Answer 22

Sales of similar properties is a good way to estimate value for a subject property. The subject property is the property that is being appraised. They pick comparable properties. Properties are chosen that have sold in a recent timeline and within the same market area.

Question 23

Subject Property

Answer 23

The subject property is the property that is being appraised.

Question 24

Uniform Standards of Professional Appraisal Practice (USPAP)

Answer 24

USPAP are the standards that must be followed for an appraisal. USPAP is short for the Uniform Standards of Professional Appraisal Practice. USPAP rules regulate how an appraisal is performed and written.

Question 25

Valuation

Answer 25

Determination of how much something is worth.