Appraisal Definitions
Click below for brief definitions of common appraisal and consulting related terminology:
Please click the links below to view details on each. Open All Close All
- Appraisal
A formal opinion of value prepared as a result of a retainer, intended for reliance by identified parties, and for which the appraiser assumes responsibility*
* Canadian Uniform Standards of Professional Appraisal Practice (2010 Edition) - Definition of Depreciation
The "Basics of Real Estate Appraising", Fourth Edition, defines Depreciation as... "A loss in property value from any cause. It can also be defined as any difference between reproduction cost or replacement cost and market value."
- The Cost Approach
"The Cost Approach to value is based on the principle of substitution, which affirms that where a property is replaceable its value tends to be set by the cost of acquiring an equally desirable substitute property, assuming that no unreasonable time delay is involved in making the acquisition."
The principle of substitution recognizes and is dependant on the cost associated with constructing a substitute property. The Cost Approach is a measurement tool in application of this principle of real property valuation. - The Direct Comparison Approach
The Direct Comparison Approach is based upon the principle of substitution which states a prudent investor would pay no more for a property than the cost of acquiring an alternative property with the same utility. The Direct Comparison Approach involves the investigation and analysis of recent, similar sales and listings of properties coupled with a process of comparison with the subject. Adjustments are made to account for relevant differences between each comparable sale and the subject. Such an adjustment process derives from each comparable an expected price that it would have sold for had it possessed the relevant characteristics that the subject possesses. From these adjusted sales prices, a defensible estimate of value for the subject may be made.
"The Direct Comparison Approach looks at the differences in the legal, physical, locational and economic characteristics of comparable sales and listings and more closely on differences in the property rights, the sales dates, the listing dates, the motivation of parties involved and the financing. The Direct Comparison Approach is directly related to the prices of comparable, competitive properties, which then determine its market value."(Basics of Real Estate Appraising, Fourth Edition 1995, Page 232). - Income Approach
The Income Capitalization Approach is defined in the Dictionary of Real Estate Appraisal, revised edition, 1989, p. 156 as:
"Approach through which an appraiser derives a value indication for income‐producing property by converting anticipated benefits, i.e., cash flows and reversions, into property value. This conversion can be accomplished in two ways: The current income stream or an annual average of several years' income expectancies may be capitalized at a marketderived capitalization rate or a capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment; secondly, the annual cash flows may be discounted for the holding period and the reversion at a specified yield rate." - Highest and Best Use
The Current Standards of the Appraisal Institute of Canada define Highest and Best Use as:
That reasonably probable and legal use of vacant land or an improved property which is physically possible, appropriately supported, financially feasible, and that results in the highest value. - Market Value
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.*
Implicit in this definition is the consummation of a sale as of the specific date and the passing of title from seller to buyer under conditions whereby:- buyer and seller are typically motivated
- both parties are well informed or well advised, and acting in what they consider their best interests
- a reasonable time is allowed for exposure in the open market
- payment is made in terms of cash in Canadian Dollars or in terms of financial arrangements comparable thereto
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale
- Reproduction and Replacement Cost
Reproduction Cost and Replacement Cost are two concepts which under certain circumstances may be equal, however are very distinct in definition. The "Basics of Real Estate Appraising", Fourth Edition, defines Reproduction Cost as...
"the actual cost as at the effective date of the appraisal, to reproduce an exact replica of the subject improvements. If the materials in the subject building are unique or out‐of‐date, and not available in the current marketplace, the cost estimate must be based on the use of highly similar materials."
The "Basics of Real Estate Appraising", Fourth Edition, defines Replacement Cost as...
"based on the cost of replacing the subject utility with a structure providing similar utility. This cost estimate is not necessarily based on similar materials, and in fact could include quite dissimilar materials, if considered appropriate by the appraiser. For example, assume that the subject building was constructed many years ago and contains exceptionally high ceilings. This antiquated construction standard does not recognize the problems associated with heat loss, wasted space, etc., and would not be acceptable to current construction standards. In this instance, the replacement cost would be based on current market requirements, thereby disregarding out‐of‐date high ceilings." - Market Rent
Market rent is defined in The Dictionary of Real Estate Appraisal (American Institute of Real Estate Appraisers, 1989) as:
"The rental income that a property would most probably command in the open market; indicated by current rents paid and asked for comparable space as of the date of appraisal." - Reserve Fund Study
A Reserve Fund Study is an analysis and recommendations for reserve funding, as a plan for the "provision of resources for major repairs and replacements of building components and improvements, or common elements, over time to ensure adequate funding of all future capital expenditures when required."1
The Reserve Fund Study will:- identify reserve components and their life span cycles and condition;
- provide current replacement cost estimates;
- provide observed condition estimates for the reserve components, including an estimate of effective age and accrued reserve costs;
- provide estimates of the remaining years of useful life of reserve components in terms of physical deterioration and functional obsolescence;
- project current replacement cost estimates at applicable long term inflation rates to estimate expected future replacement cost estimates;
- project the value of the current reserve fund requirements compounded at long term interest rates; and
- calculate the reserve funding requirements which if invested in qualified securities will be sufficient to fund all future reserve expenditures.
