JARGON AND DEFINITIONS
Have you heard an appraiser use terms you don’t understand? Adjustment? Comparable? Market Value? MLS? Obsolescence? Listed below are some examples of common appraiser jargon and their meanings.
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 (Direct Comparison Approach, Cost Approach, & Income Approach)
There are three ways to determine the value of real property, and each plays a part in property appraisal.
- Direct Comparison Approach: This is the most widely-used and accepted approach in residential practice. 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? The cost approach includes concepts like “economic life” and “effective age” which are useful 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. 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.
Personal property that may be on the subject property but which does not factor into the opinion of value in the appraisal report.
Comparable, "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.
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.
The appraiser’s opinion of value as written in their 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.
Gross Living Area (GLA)
This is the sum of all above grade floor space, including stairways and closet space. GLA is usually calculated by using exterior wall measurements.
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.
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 (in which case data about comparables is sought through local real estate offices or private sales obtained from appraiser data).
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.
Short term used for the property being appraised – the “Subject property.”
Remaining Economic Life
The duration during which a property can provide benefits to its owner.
CUSPAP (Canadian Uniform Standards of Professional Appraisal Practice)
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.