An Overview of Appraisal Terminology

Last updated on April 24th, 2024 at 01:10 am

Real estate professionals, investors, and homeowners: knowing the appraisal terminology you’ll find within your completed appraisal report will improve your overall understanding of the report and provide you with more insight into the appraisal process.

Understanding real estate appraisal terminology is especially beneficial for anyone in the midst of the home buying process. 

This list of common appraisal terms will provide you with a better understanding of the terms you’ll find in a completed report. 

An appraisal is a professionally licensed or certified appraiser’s unbiased opinion of the value of a property based on its characteristics and the surrounding market conditions.

An “appraisal” is different than a tax assessment, zillow zestimate, or comparative market analysis (CMA) completed by a realtor.

RELATED: KEY COMPONENTS OF A REAL ESTATE APPRAISAL

Appraisals are essential to determine a property’s market value for a variety of situations, including buying or selling, obtaining a mortgage or refinancing, for taxation purposes, or a host of other reasons.

An appraiser is a state-licensed professional trained to evaluate properties and estimate their value using standardized procedures and methodology.

The market value, as defined within an appraisal report, is the estimated amount for which a property will sell for on the date of the appraisal, in a sale where both buyer and seller act prudently and knowledgeably.

Things that influence your homes value include (but are not limited to):

Understanding a home’s market value is important for fair real estate transactions and is often the basis for mortgage approvals and other important financial decisions.

This method compares the subject property with similar properties (comparables) that have recently sold in the area.

Most appraisal reports require a minimum of three closed sales within the last year.

This approach is based on the premise that a property’s value is equal to the cost of constructing a replica, minus any depreciation.

Depreciation becomes more subjective and difficult to estimate accurately as a home gets older. 

As a result, the cost approach is considered most reliable for newer homes.

Typically used for investment properties, this method determines value based on the income that a property can generate.

Each of these methods serves a specific purpose and is selected based on the property type and the purpose of the appraisal.

Homes with similar characteristics to the subject property.

These are used in the Sales Comparison Approach to help determine market value.

Monetary amounts added or subtracted from comps to account for differences between them and the subject property.

A decrease in a property’s value due to wear and tear, it’s design, or external factors such as economic conditions.

The estimated cost to build a structure with equal utility as the subject property using modern materials and standards.

A ratio used to estimate the return on investment for income properties, calculated by dividing the net operating income by the current market value or sale price.

A metric used to value a rental property based on its price divided by its gross rental income. 

For example – the GRM of a property that sold for $200,000, and generates a monthly income of $1,500 would be: 

$200,000 / $1,500 = GRM of 133.33

An examination of the real estate market to understand trends, values, and other factors affecting the sale and purchase of properties in that market.

The most profitable use of a property, as determined by its physical characteristics and surrounding market conditions.

This analysis is required within an appraisal report to analyze any potential impact on value.

The 4 factors analyzed in determining a property’s highest and best use are: 

A table used to document adjustments made for each comp in the Sales Comparison Approach.

The grid includes columns for property characteristics such as size, age, location, and amenities, along with corresponding adjustment amounts.

The most common appraisal report for mortgage lending, this type of report offers a comprehensive analysis of a single-family home and includes a personal inspection by the appraiser.

Desktop Appraisal 

An appraisal that is carried out with online data,  public records, and other available data instead of an in-person inspection.

An appraisal that is limited to the property’s exterior observation only, as well as an analysis of public records, prior listings, or information provided by the homeowner.

An appraisal that combines both an exterior and interior inspection, as well as data collected through mobile applications or an on-site inspection by a third party.

An appraisal report that includes a detailed written analysis of a property’s value based on market conditions and other factors.

A restricted appraisal report is for situations where only the client will use the data, with no other intended users. It’s designed for situations where only a limited amount of information regarding the appraiser’s opinions and conclusions is necessary.

A report that examines the accuracy and completeness of another appraisal. This may include recommendations for additional information or correction or may concur with the original appraisal report.

RELATED: A Homeowners Guide To The Different Types of Appraisals

A secondary housing unit on a single residential lot.

An amount added or subtracted to a comparable’s sale price to account for differences between it and the subject property.

Adjustments are extracted from market data and used to determine a value, or value range for the subject.

The estimated value of a property after necessary repairs or renovations have been completed.

his refers to the selling prices of comparable properties that have been adjusted to account for differences in features, conditions, or other factors that affect their value when compared to the subject property being appraised.

The new value reflected after adjustments have been made is called the comparables “adjusted sale price”.

An Appraisal Management Company (AMC) is a business that oversees the process of valuing properties. AMCs act as intermediaries between lenders or clients and independent appraisers, coordinating appraisal assignments, ensuring compliance with regulations, and managing quality control.

They facilitate the appraisal process for various purposes, such as mortgage lending, real estate transactions, and financial planning.

An appraisal report is the document prepared by a licensed appraiser that explains how they determined the value of the property.

The report includes details about the research methods, factors considered, the final value conclusion. 

An appraiser is a trained professional who assesses and determines the value of properties, assets, or items based on factors like market conditions, comparable sales, condition rating, and other relevant considerations.

Their evaluations are typically used for purposes such as real estate transactions, insurance, taxation, or financial planning.

Appraised value is the estimated monetary worth of a property, asset, or item, determined by a qualified appraiser and based on various factors such as market conditions, comparable sales, condition, and others.

The value assigned to a property by a public tax assessor for the purpose of calculating property taxes.

A property that is deemed similar to the subject property in terms of location, size, condition, and other features.

Comparables are used by appraisers as part of the sales comparison approach to determine the value of a property.

The cost or price to restore a component which has deferred maintenance to new or acceptable condition.

Economic life refers to the period over which an asset can generate income or provide value before it becomes obsolete, uneconomical, or no longer useful.

A legal right to use another person’s land for a specific purpose.

Easements can affect the value and use of a property, as they may limit what an owner can do with their land.

This is the date the value in the appraisal is effective. This usually refers to the date the property was inspected by the appraiser.

This is important due to market fluctuations and potential changes in the condition of the property over time.  

When one property owner illegally intrudes on another’s property.

Encroachment can impact property value and may require legal action to resolve.

Excess Land is extra land not needed for the current development.

It might have a different best use than the developed area and could be sold separately, valued on its own.

Extraction is a technique used to gauge the value of land.

It involves determining the depreciated cost of improvements made to the property and subtracting that from the total sale price.

This calculation provides an estimate of the land’s sale price. Additionally, extraction is also used to derive capitalization rates by analyzing property sale prices and net operating income.

Final Reconciliation is the concluding step in the process of forming a value assessment.

It involves combining multiple value indications obtained from market data to arrive at a conclusive value opinion.

This can result in either determining a final range of value or a single point estimate.

This term refers to a reduction in the value of a property due to outdated design, features, or layout that make it less desirable than other properties.

This occurs when a property’s design or layout no longer meets current market standards or preferences, resulting in decreased utility and/or value.

This term refers to the usefulness or practicality of a property in serving its intended purpose.

It reflects how well the features, design, and layout of the property fulfill the needs of its occupants.

Properties with superior functional utility are typically more desirable and valuable in terms of real estate.

The total floor area of a building, usually pertaining to commercial properties.

The total living area contained within the exterior walls of a residential property.

Appraisers must adhere to strict measurement guidelines when calculating GLA.

A private association often formed by a real estate developer to manage a community of homes.

HOA fees are reported and analyzed within an appraisal report as they can impact the market value of a property.

A formal document outlining the terms and conditions of the appraisal services needed by the appraisal client.

This includes details such as the purpose of the appraisal, the property to be appraised, the fee structure, the timeline for completion, and other relevant terms.

The letter of engagement serves as a contract between the appraiser and the client, clarifying expectations and responsibilities for both parties.

RELATED: COMMON APPRAISAL QUESTIONS

The most probable price that a property would bring in an open and competitive market, where the buyer and seller are both well-informed and acting without undue influence.

Most appraisals reflect the current market value of a property.

A rating scale used in appraisal reports to indicate the relative quality and condition of a property based on verbiage in the UAD (Uniform Appraisal Dataset).

A measure used to analyze the potential profitability of an investment.

ROI is calculated by subtracting the cost of the investment from its final value, then dividing this new number by the cost of the investment then multiplying it by 100.

This refers to land that exceeds what is needed for the primary use or development of a property.

This land could potentially be sold separately from the main property or used for alternative purposes.

Assessing surplus land involves determining its value separate from the value of the primary property and considering its potential for sale or development independent of the main parcel.

A standard for reporting appraisal information established by Fannie Mae and Freddie Mac.

Lenders require appraisal forms to be UAD compliant.

This ensures that appraisers are using the same format and terminology when reporting appraisal information.

The set of standards that govern the professional practice of appraisers in the United States.

Local laws that regulate land use and development within a specific area.

Zoning can affect the type of property that can be built on a certain piece of land and may impact the value of a property.

Disclaimer: Our articles are written by a Licensed or Certified Residential Appraiser. This information is meant for educational or informational purposes only, and does not support or indicate an opinion of value for your home or property, nor does it provide any type of value indication for a lender, attorney, realtor, or any other individual or entity.

For anyone involved in real estate transactions, comprehension of the terminology included in this article is key in understanding how to read and interpret an appraisal report.

By familiarizing yourself with these terms, you can approach property appraisals with more clarity, whether you are negotiating a sale, securing a mortgage, or evaluating an investment property.

Keep this guide handy and refer back to it the next time you encounter an unfamiliar appraisal term.