When I first starting out in the appraisal profession, I remember at time when I had appraised a large number of homes that were roach and flea infested.
My sister-in-law asked me how much I would “take off” in these situations? I explained that if was wearing cuffed pants, when I returned home, I would usually take them off in the garage so that those little critters wouldn’t hitch a ride into our house. After giving me a blank stare, she busted out laughing. What she was really asking me is what kind of adjustment I would make in my appraisal report. In my defense, if she had said how much would I have adjusted for in this situation, I may have understood better what she was asking. But then again, maybe not.
If you are reading an appraisal report, there may be some additional terms that you may not completely understand. So, this week, I thought I would just provide some basic definitions of some common terms that you might find when reading a residential appraisal report. It’s not an exhaustive list, though you may feel exhausted after reading it.
Absorption Rate – This is a measure of supply that calculates the rate at which the supply of inventory of properties, in a specific area, are sold.
Adjustments – A way of mathematically reflecting the market reaction to differences in components of value between the property being appraised and the comparable sale.
Amenity – Something that enhances the appeal and/or functionality of a home. For instance, a deck, patio or porch are considered to be amenities, just to name a few. Not all amenities increase market value.
Capitalization (Cap) Rate – A rate that is used to convert income into value.
Cash-Equivalency – The price of a property if it were purchased with only cash. For an example, if a home sold for $100,000 with the seller paying $5,000 in closing costs for the buyer in the loan process, then the cash equivalency would be $95,000.
Easement – The right granted to allow someone to move across a property for a specified purpose. Most homes typically have utility easements which allow the utility company to access the property for routine maintenance and readings.
Encroachment – When something on one property intrudes or trespasses on another property. For instance, a garage may have been built partially on one property but may have inadvertently been construction partially on the adjacent property, not owned by the garage owner.
Effective Age – This is the estimated age of the property based upon its condition, not its actual age. For example, a home could be 50 years old and may have just been completely renovated. It could have an effective age of 5 years.
External Obsolescence – An external situation that reduces the value of an improvement. For example, being located next to high voltage power lines or being located next to an industrial warehouse would be examples of external obsolescence. This could also include economic conditions that affect the value of a properties in the area.
Functional Obsolescence – A reduction in usefulness or desirability due to functional issues or inadequacies. Often this results in a loss of value. For example, tandem bedrooms in which one bedroom can only be accessed by moving through another bedroom. See my article “Do Tandem Bedrooms and Garages Impact Value?”.
Gross Building Area (GBA) – This area includes the sum of ALL of the floor levels, including the basement, whether finished or not. It includes the areas within the exterior walls. Typically GBA is used when appraising multi-family dwellings and commercial properties. The GBA would also include mezzanines, penthouses, attics, enclosed porches and garages.
Gross Living Area (GLA) – In general terms, it is the main living area of a home that are heated and finished and above grade (above the ground or land line). The area must be suitable for living in all seasons. GLA includes hallways, closets, bedrooms, bathrooms and kitchen areas. Typically the GLA is measured from the exterior perimeter of a home, if the home is detached. What is considered to be GLA estimates can at times differ depending on the standard of measurement being used. The ceiling height should generally be at least 7′. Basement, garage and porch areas are not included in the GLA. See my article “How Many Times Would You Line to Pay for That Basement?” and “Are Finished Basements Living Area”.
List To Sales Price Ratio – The ratio between what a home sells for in relation to its listing price, reflected in terms of a percentage. See my article “How Much Of Your Asking Price Will You Get”. Please also see Ryan Lundquist’s article “An underrated metric & slumping volume”.
Physical Obsolescence – This reflects the physical deterioration of a property. In an appraisal, it is calculated by dividing the effective age by the estimated lifespan of the property. For example, if a property had an effective age of 15 years and an estimated lifespan of 55 years, the estimated physical depreciation or obsolescence would be 27.27%.
Regression Analysis – The use of mathematical and statistical methods in order to estimate a specific component of value (or variable) in relation to another by the analysis of regression coefficients, curves and lines to empirical data. When using this type of method to estimate more than one relationship, it is called Multiple Regression.
Scuttle – A small access door that is used to access the attic.
Stigma – Typically an adverse perception by the public which may affect the market value and/or marketability of a property. See my article “4 Examples of How Stigmas Can Impact Real Estate”.
Wainscot – Please refer to my article “What is Bathroom Wainscot”, and decide for yourself. 🙂
I hope that you find these definitions to be useful the next time you’re reading an appraisal report. These are very basic definitions of these terms. There are more detailed definitions that exist. These were used to give you a quick and relatively simple meaning of these phrases. Please also note that some of these terms have more than one definition.
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THIS WEEK’S NEIGHBORHOOD VIDEO – City of Euclid
Based upon the results on my Twitter survey, the city of Euclid, OH was the winner. I hope you enjoy it! Please leave me a message as to what you would like to see in future neighborhood videos.
Here are some other articles and videos I enjoyed this week! I hope you will also…
Surfing the Yield Curve of Housing – Housing Notes by Jonathan Miller Housing Notes by Jonathan Miller
An underrated metric & slumping volume – Sacramento Appraisal Blog
Should I Make Repairs To My Home Before It’s Appraised? – Birmingham Appraisal Blog
Why hire an appraiser? – Ann Arbor Appraisal Blog
What kind of appraiser are you? – George Dell’s Analogue Blog
Using the R Programming Language to Produce Correlation Matrices & Correlograms for Residential Appraisal Reports – Portland Appraisal Blog
Good idea Jamie. Interesting choices too. You might want to include “comparable” next time.
Thanks Joe! You’d think I would have included a definition of comp! I will add it to part two!😂👍👍
Nice list here Jamie. I was hoping to find “Roach adjustment” though…. 🙂 Thanks for linking to my sales to list price thoughts too. Very cool of you.
LOL! Thanks Ryan! There definitely is a negative market reaction to roach infestation!😃 I was happy to link your article! You are very welcome! I hope you’re doing great!
Great article Jamie. As appraisers, we use these terms daily and often forget that those who read our reports don’t really understand many of the terms.
Thanks so much Michael! I have found over the years that many do not really understand what these terms mean. Even something as simple as what a scuttle is. Hopefully my readers will learn something new.