Jargon and Definitions

Have you heard an appraiser use any of these terms? Adjustment? Comparable? Market Value? MLS? Obsolescence? We don't mean to speak a foreign language, but every profession has its specialized terms. What res ipsa loquitur is to a lawyer and triple witching is to day traders, obsolescence is to appraisers. Here are some examples of common appraiser jargon and their meanings:

Adjustment:  When comparable properties have been identified, the appraiser adjusts the value of the subject property according to differences in living area, site frontage, amenities and other valuation factors. This is where the knowledge and experience - professional expertise - of an appraiser is most valuable.
Three Approaches to Value: There are three ways to determine the value of real property, and each plays a part in property appraisal.

  • Direct Comparison Approach: The most widely-used and accepted in residential practice is this approach. This approach bases its opinion of value on what similar properties in the vicinity have sold for recently, with appropriate adjustments for time, site size, living area, amenities and so on. It is these adjustments where the expertise of the professional appraiser becomes necessary -- no computer can tell you how much or little to mark up for a fireplace without knowing the neighborhood or even talking to Realtors and recent buyers in the area about how important that amenity is in that particular location.
  • Cost Approach: How much would a property cost to replace, that is, rebuild, minus "accrued depreciation," which is, depreciation that has occurred since the property actually was built? The cost approach includes concepts like "economic life" and "effective age" that are mostly of use in determining the value of special use properties, special purpose properties or properties where subsequent structural improvements greatly impact value.
  • Income Approach: Some properties generate income for their owners -- the most obvious examples being rental properties such as apartment buildings, non owner-occupied houses and duplexes and the like. The rental income an owner might reasonably expect from a property is part of its value. For a purely owner-occupied residential property, this may not be applicable, but it can be important if the property is to be rented out or used otherwise to generate income.

Chattel:  Personal property that may be on the subject property but which does not factor into the opinion of value in the appraisal report.

Comparable or "Comp” or "Comparable Sale":  Properties used in the report that are similar to the Subject property, that are located nearby, and which have sold recently, are used as a basis to estimate the market value of the Subject property. The Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) establish guidelines for comparable selection.

Drive-by:  An appraisal that is limited to viewing the Subject property from the street together with an examination of comparable sales. This confirms that the property is actually there and has no obvious defects or damage visible from the street viewing.</p>

Market value: The appraiser's opinion of value as written in his or her appraisal report should reflects the market value of the property -- what a willing Buyer would pay a willing Seller assuming an arm's length transaction.

GLA or "Gross Living Area":  This is the sum of all above grade floor space, including stairways and closet space. GLA is usually calculated by using exterior wall measurements.

Latent defects: A defect of the property that is not readily apparent but which may impact the market value. Structural damage or insect infestation might be examples.

MLS: A Multiple Listing Service is a proprietary listing of all properties on the market in a given area and their listing prices, as well as a record of all recent closed sales and their sales prices. In Winnipeg the service is provided by the Winnipeg Real Estate Board (WREB) and used by real estate agents. Appraisers pay for access to these databases to aid in comparable selection and adjustment research. In rural areas MLS Sales may not be available with comparables sought through local real estate offices or private sales obtained from appraiser data.

Obsolescence:  The value of assets diminishes as their capabilities degrade or more desirable alternatives are developed. Functional obsolescence is the presence or absence of a feature which renders the property undesirable. Obsolescence can also occur because the surrounding area changes, making a feature of the property less desirable. An example may be the small closet spaces, or bedrooms located adjacent to the kitchen, in home designs from older development eras.

Subject: Short term used for the property being appraised - the "Subject property."

Remaining Economic Life:  The time during which a property can provide benefits to its owner.

CUSPAP: Short for Canadian Uniform Standards of Professional Appraisal Practice. CUSPAP promotes standards and professionalism in appraisal practice, as set by the Appraisal Institute of Canada, a non-governmental association chartered to, amongst other things, maintain appraisal standards.