Does appraisal industry lingo confuse you?
Are you a loan officer, real estate agent, or homeowner who has read an appraisal only to come away scratching your head? Sometimes real estate appraisal reports can look a little like hieroglyphics but today I’m going to help unravel some of the mystery and confusion associated with common appraisal industry lingo used in an appraisal.
I hope you come away with a better understanding of what these terms mean and a better understanding of the appraisal report. If you have a question about an appraisal industry lingo term I have not included here please leave a comment below and I will do my best to explain it to you. Ready? Let’s get started.
Common appraisal industry lingo terms
Comps- Comps is short for Comparables. A comparable is a property included in an appraisal report and is part of the sales comparison approach. A comparable is a property that is similar to the subject property in physical characteristics such as gross living area, age, design, appeal, condition, location, price range, and amenities. It is a property that a potential buyer would also consider if the subject property were not available.
Amenities- Amenities are the benefits or positive features a property offers. These can be natural or man-made. A natural amenity would be its view of a lake or something similar. An example of a man-made amenity would be a swimming pool.
Gross Living Area- The gross living area (GLA) of a home is its above grade heated and cooled area. This DOES NOT include finished areas of the basement or other finished areas that you get to by going outside of the main living area. You cannot add finished areas over a detached garage to the grossing living area, nor can you add a he-shed or she-shed. I wrote about the different areas included in the GLA if you want to learn more.
Adjustments- Adjustments are the math calculations made to the comparables for buyer or market recognized differences in features and amenities between the subject and comparables. Generally speaking, if the comp has a feature that a buyer would pay more for, and the subject property does not have this feature, then a negative adjustment made to the sale. The opposite is also true for the comp not having a positive feature that the subject has, and a positive adjustment is made to it. I wrote another post about how appraisers come up with adjustments if you’re interested in reading more.
Functional Obsolescence- This occurs when a built-in feature of the home has a negative impact on its marketability. The negative impact is recognized by buyers who will typically pay less for the property because it exists. An example of this would be a pass through bedroom that you have to walk through to get to another bedroom. This causes the occupants of the first bedroom to be disturbed when others access the adjacent bedroom.
External Obsolescence- An external form of obsolescence occurs when something outside of the boundaries of the property negatively influences its value. Being located next to railroad tracks can be a form of external obsolescence if buyers would pay less for the property than they would a similar home that is not located next to railroad tracks. Another example would be property located next to a factory that produces a foul odor.
Effective Age- The effective age of a property is the age it appears to be. A home may have been built 50 years ago but with updates and renovations it may only appear to be 10 years old so this would be its effective age.
Absorption Rate- This is a measure of supply and demand and it gives us an indication of how many months of inventory is available. It considers the number of homes currently listed for sale without any more being added and the rate of recent sales. Depending on the amount it can indicate whether there is a shortage or oversupply of homes on the market or if we are in balance.
Sale- A sale is a recently sold property that is not necessarily a comparable. If it does not meet the characteristics of a comparable it is just a sale and should not be used as a comp. Even though it may be in the same neighborhood as the subject property it may not be comparable if it varies significantly in all other respects.
Depreciation- Generally speaking depreciation is a loss in property value from any cause. Some of the forms of depreciation include physical, which occurs when the property ages and/or systems break and need repair or replacement. Functional depreciation occurs when the property value is reduced by a faulty floor plan. External depreciation occurs when factors outside of the property itself cause it to be worth less (see various forms of obsolescence).
Sales Comparison Approach- The sales comparison approach is one of the three approaches to value in an appraisal. It compares recently sold properties to the subject in order to develop an opinion of value.
Cost Approach- The cost approach is another of the three approaches to value that takes into consideration current construction costs, factor in depreciation, and includes the current market value of land that the house is located on. Cost estimates are typically obtained from local builder estimates or national cost services like Marshall & Swift Residential Cost Handbook.
Income Approach- The income approach to value considers the income earning potential of the property. With this approach, the appraiser analyzes rent amounts as well as gross rent multipliers to develop their opinion of value. This approach is most accurate when reliable rental information is available.
Arm’s Length Transaction- An arm’s length transaction is one in which both parties are not under any undue pressure and both are acting independently in their own self-interest. Common types of sales situations that may not be arm’s length transactions include foreclosure sales and/or sales in which divorce is involved.
Sale Price to List Price Ratio- The sale price to list price ratio is exactly what it implies. It is a ratio comparing the final sale price of a home to the initial asking price. The higher the ratio (closer to 1.0) the closer the sale price was to the asking price. A slow market may have a lower number and a hot market may have a number higher than 1 if buyers continually bid up the price due to a lack of inventory and an abundance of buyers.
Competitive Market Area- This term provides an alternative description of the area from which comparables can be pulled from. Most of the time this area is described as “neighborhood”, however that can be too restrictive. A competitive market area provides the chance to expand the search boundaries to other areas that are similar to the subject in school system, access to business centers, and comparable properties. Rather than being restricted to the subjects subdivision or nearby neighborhood we are able to go to more distant areas that buyers would potentially look.
Do you have other terms you’re unsure of? Let me know by leaving a comment below and I’ll do my best to help. As always, thanks for reading.