Concepts Definitions

• Appraisal: The process of evaluating real property to determine its value. It provides a neutral and fair assessment of a property’s true market value, which is important for buyers, sellers, agents, and lenders.

• Market Data Approach (Sales Comparison Approach): One of the three key methods of appraisal, it involves estimating property value by comparing the subject property to similar properties (comparables or “comps”) that have recently sold in the same general neighborhood. This is generally considered the most popular and reliable approach for residential one-to-four-unit properties.

• Comparable (Comp): In appraisal, a property that is similar to the subject property and has been sold recently. Sales prices of comparables provide data for estimating the value of the subject property.

• Cost Approach to Value: One of the three key methods of appraisal, which estimates the value of the subject property by calculating the cost of replacing the improvements, deducting estimated accrued depreciation, and adding the estimated market value of the land. It is often used for specialized properties like service buildings (e.g., city halls, churches, schools) where sales comparables are hard to find.

• Income Approach to Value (Capitalization Method): One of the three main methods of appraisal, which estimates property value based on the net income it produces. It is primarily used for income-producing properties like rental homes or apartment buildings, by converting anticipated net income into present value.

• Comparative Market Analysis (CMA): An estimate of property value for real estate agents based on indicators from the sale of comparable properties. While helpful, it is not as detailed or comprehensive as a full appraisal report completed by a qualified appraiser. CMAs typically detail sales or listing comparables from the past six months.

• Principle of Substitution: An economic principle in appraisal that states that if two properties are equally desirable, the less expensive one is likeliest to sell first. The maximum value of a property is determined by the available supply of similar properties nearby.

• Principle of Highest and Best Use: The use of a property that will usually bring in the highest value estimates over the long term. Appraisers consider this when evaluating raw land or properties with potential for rezoning or redevelopment.

• Depreciation: The loss of value of a building structure over time due to wear and tear, outdated features (functional obsolescence), or external factors. Land does not depreciate.

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