Real Estate Terms-Property Valuation And Financial Analysis

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appraisal

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An individual's opinion of a property's value on a specific date, documented in an appraisal report.

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broker price opinion (BPO)

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An agent's opinion of a property's fair market value based on comparable sales.

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capitalization approach

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An appraisal method used by an appraiser to arrive at a property's value based on the present worth of a property's future net operating income.

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capitalization rate (cap rate)

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The annual rate of return on investment produced by the operations of an income property or sought by an investor on the investment of capital. The ___ ____ is calculated by dividing the net operating income by the price asked or offered for income property.

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comparable sales (comps)

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Sales of properties recently sold which have similar characteristics as the subject property being evaluated and are used for analysis in the appraisal of the subject property.

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depreciation

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Loss of property value brought about by age, physical deterioration or functional or economic obsolescence. The term used to account for the annual tax-free return of capital invested in improvements over the life of the improvements, as a reduction in the property's cost basis.

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economic life

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The period of time over which a property will yield a return on capital invested to own it.

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economic obsolescence

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A loss in value of a property due to external factors and not the condition of the property itself.

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effective age

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The physical age of a property based on the condition of the structure, distinct from its chronological age.

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elements of value

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Factors that must be present for real estate to have value: demand, utility, scarcity and transferability.

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ethics

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That branch of fiduciary science, idealism, justness, and fairness, which treats of the duties which a member of a profession or craft owes to the public, client or partner, and to professional brethren or members. Accepted standards of right and wrong fiduciary conduct, behavior or duty.

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fair market value (FMV)

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The price a reasonable, unpressured buyer would pay for property on the open market.

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financial analysis

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The consideration of the durability, quantity and quality of income and expenses generated and incurred by an income-producing property.

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functional obsolescence

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

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gross rent multiplier (GRM)

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A factor which, when multiplied by the gross income of a property, produces an estimate of the property's value.

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highest and best use

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An appraisal phrase addressing the use of a property which is most likely to produce the greatest net return on the land and/or buildings over a given period of time.

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income approach

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One of three methods of the appraisal process applied to income producing property to develop the appraiser's opinion of value.

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influences on value

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An aspect of the principal of change, recognizing the effect of physical, economic, government and social changes on real estate value.

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loan-to-value ration (LTV)

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A ratio stating the outstanding mortgage balance as a percentage of the mortgaged property's fair market value. The degree of leverage.

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market comparison

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An appraisal method used by an appraiser to arrive at a property's value by a comparison of recent sales prices of similar properties, adjusted for differences in the properties.

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narrative report

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A summary of all factual materials, techniques and appraisal methods used by the appraiser in establishing the value of a property. This is the most thorough type of appraisal report.

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opportunity cost

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The cost of an action that is forgone when choosing to take an alternative action, usually a consideration when making one investment over another.

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physical life

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The total number of years a building is presumed to potentially exist in a productive capacity.

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principles of value

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The application of several appraisal principles to arrive at a final value. The basic principle is substitution.

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reconciliation

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The final step in the appraisal process. Placing weight on the alternative value conclusions, to arrive at a final value decision.

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replacement cost

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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.

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return on investment (ROI)

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A measure of annual income or profits on a sale in relation to capital invested.

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site valuation

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The appraised valuation of the ground (site) separate from any structure (improvement) that may be on site.

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value

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The present worth stated in dollars of the future benefits arising out of the ownership of a property.

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absorption rate

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The estimated time required to sell or lease property within a designated area at its fair market value.

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ad valorem tax

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Real estate taxes imposed on property based on its assessed value.

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vacancy rate

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The percentage of a building's space that is not rented over a given period.