Valuation tricks that make appraisal click

DUST is foundational to real estate valuation — if any one element is missing, value cannot exist. A property in a flood zone may have Utility and Transferability but lack Demand. An oil field may have Demand and Scarcity but lack Transferability if it can't be sold. All four must work together.

Real estate value doesn't exist in a vacuum — PEPS reminds you that four external forces are always at work. A great property in a bad location (Physical), during a recession (Economic), in a high-tax area (Political), or in a declining neighborhood (Social) will suffer in value regardless of its condition.

TIMMUR covers all the operating expenses you subtract from gross income to get Net Operating Income (NOI). Remember: mortgage payments are NOT an operating expense — they are a financing cost. NOI = Gross Income minus Vacancy minus TIMMUR expenses.

Cost approach: what would it cost to rebuild minus depreciation plus land value. Used for unique properties, new construction, special purpose buildings. Sales comparison (market) approach: compare to recent sales of similar properties — most common for residential. Income approach: value based on income generated — used for investment properties.

CMA: done by a real estate agent, not a licensed appraiser. Uses recent sales, active listings, and expired listings of similar properties. Used to help sellers set a realistic listing price or buyers make competitive offers. Formal appraisal: done by licensed appraiser, required by lenders, legally defensible.

Physical deterioration: wear and tear, deferred maintenance — can be curable (paint) or incurable (foundation). Functional obsolescence: outdated features (one bathroom in a 4-bedroom home, outdated floor plan) — can be curable or incurable. Economic/external obsolescence: outside the property (new highway nearby, plant closure) — always incurable.

Cap rate (Capitalization rate) = Net Operating Income ÷ Property Value. Rearrange: Value = NOI ÷ Cap rate. If NOI = $50,000 and cap rate = 5%, Value = $1,000,000. Higher cap rate: riskier investment or lower-quality area. Lower cap rate: safer investment or premium location.

Gross potential income (all units full) minus Vacancy and credit loss minus Operating expenses (taxes, insurance, maintenance, management, utilities) = NOI. DOES NOT include mortgage payments (debt service) — NOI is used before financing to compare properties on equal footing.

GRM = Sales price ÷ Gross monthly rent (or annual). To find value: Value = GRM × Monthly rent. Less accurate than cap rate because it ignores expenses and vacancy. Used as a quick screening tool. Example: property sells for $300,000, rents for $2,000/month → GRM = 150.

A rational buyer will not pay more for a property than the cost of acquiring a comparable substitute. This principle underlies the sales comparison approach. Sets the ceiling on value. Related: principle of contribution (a feature is worth what it adds to the whole, not what it costs).

Appraisers must determine the highest and best use of a site — the use that produces the highest value. Must be: Legally permissible (zoning), Physically possible (soil, size, shape), Financially feasible (demand exists), Maximally productive (produces highest return). May differ from current use.

Market value: the most probable price a property would sell for in a competitive, open market with informed buyers and sellers and no unusual pressures. Market price: what it actually sold for — may be above or below market value. Cost: what was spent to build it. All three can be different.

Appraiser doesn't average the three approaches — they weight each based on reliability for that property type. For a single-family home: sales comparison usually weighted most heavily. For an apartment building: income approach. For a special-use property: cost approach. Final value is a single point estimate.

Appraisal: professional opinion of market value, usually for mortgage lending. Done by licensed appraiser. Assessment: value placed on property by county assessor for property tax purposes. Often different from market value. Assessment ratio: assessed value ÷ market value. Ad valorem tax: based on property value.

Assemblage: the process of combining two or more adjacent parcels into one larger parcel. Plottage: the increase in value that results from assemblage. Example: three 50×100 lots worth $100,000 each → combined 150×100 lot worth $400,000 (plottage value = $100,000). Developer can build something not possible on individual lots.

Every appraisal question uses one of these three approaches. COSI helps you remember all three and when each is used.

"Please Fix Everything" — that's what depreciation means for a property.

A buyer won't pay more than the cost of an equally desirable substitute. This is why comps work. The principle of substitution drives the entire sales comparison approach.

Comp BETTER than subject → SUBTRACT from comp. Comp WORSE than subject → ADD to comp. Always adjusting the comparable to match the subject property.

CMA uses recently sold comparable properties (comps) to estimate a subject property's value. Select comps: similar size, age, location, condition — ideally within 1 mile and 6 months. Adjustments: comp has better feature than subject → subtract from comp's price (you're paying for what you have, not what the comp has). Comp is inferior → add to comp's price. Example: comp sold $300,000 with 3-car garage; subject has 2-car → subtract $10,000 → adjusted value $290,000. CMA is an opinion of value, not an appraisal.

Sales Comparison (Market) Approach: compare subject to recent sales of similar properties with adjustments — best for residential. Income Approach: value based on income the property generates (NOI ÷ Cap Rate) — best for investment/commercial property. Cost Approach: land value + cost to reproduce building - depreciation — best for special-use properties (schools, churches) with no comparable sales or income. Highest and best use: before any appraisal, must determine the legal, physically possible, financially feasible use that produces highest value.

Physical deterioration: wear and tear from age and use. Curable: cost to fix is less than value added (deferred maintenance). Incurable: too expensive to fix relative to value gain. Functional obsolescence: property feature that is outdated or poorly designed (8-track player, awkward floor plan). Curable: can be fixed economically. Incurable: cannot. External (economic) obsolescence: caused by factors OUTSIDE the property — always incurable (busy highway next door, nearby industrial plant). This is the only type caused by external forces.

Conformity: value maximized when properties are similar to surrounding properties. Anticipation: value reflects expected future benefits. Supply and demand: price rises when supply falls or demand increases. Highest and best use: use that produces maximum value. Progression: lower-value property benefits from proximity to higher-value properties. Regression: opposite — higher-value property hurt by proximity to lower-value. Substitution: no one pays more than the cost of an equally desirable substitute (basis of all three appraisal approaches). Contribution: value of a component equals what its absence would cost the whole.

Step 1: Estimate land value as if vacant (sales comparison of similar vacant lots). Step 2: Estimate reproduction or replacement cost of the building new. Reproduction: exact replica. Replacement: same utility with current materials. Step 3: Estimate total depreciation (physical + functional + external). Step 4: Value = Land + (Replacement Cost − Depreciation). Example: Land $80,000. Building replacement cost $300,000. Depreciation: physical $30,000 + functional $10,000 + external $0 = $40,000. Building value = $260,000. Total value = $340,000. Most reliable for new construction and special-use properties.

Chronological age: actual years since built. Effective age: age the building appears to be based on condition and maintenance — can be more or less than chronological age. Economic life: total useful life of the building (typically 40-60 years for residential). Remaining economic life: economic life minus effective age. Depreciation %: Effective Age ÷ Economic Life. Example: 20-year-old building with 60-year economic life → 20/60 = 33.3% depreciated. If replacement cost is $300,000: depreciation = $100,000. Building value = $200,000. Key exam point: use EFFECTIVE age, not chronological age.

Assemblage: the process of combining two or more adjacent parcels into one larger parcel under single ownership. Plottage: the increase in value that results from assemblage — the combined parcel is worth more than the sum of individual parcels. Why: larger parcel enables higher and better use, more development potential, more attractive to developers. Example: Two lots each worth $100,000 = $200,000 combined. After assemblage, combined lot may be worth $260,000. Plottage value = $60,000. Common in urban development and land banking. Opposite of subdivision (splitting one parcel into smaller lots).

Gross Income Multiplier (GIM): Sale Price ÷ Gross Annual Income (all income sources). Gross Rent Multiplier (GRM): Sale Price ÷ Gross Annual RENT (rent only). For properties where all income = rent, GIM = GRM. For mixed-use or properties with additional income streams, GIM is more accurate. Both ignore vacancy and expenses — quick screening tool only. To value: GIM × subject property's gross annual income = estimated value. Derive GIM from comparable sales: find GIM for 3+ comps, average them, apply to subject.

Paired sales analysis (matched pairs): to quantify the value of a specific feature, find two comparable sales that are identical in every way except for that one feature. The price difference between the two sales represents the market's value of that feature. Example: Find Sale A (pool) at $320,000 and Sale B (no pool) at $300,000, all else equal → pool adjustment = $20,000. Appraisers use multiple paired sets and average to get reliable adjustments. Important: the more similar the paired sales, the more reliable the adjustment. This is the market evidence appraisers cite when adjustments are challenged.

Market value: the most probable price a property would sell for in an arm's length transaction with informed, willing, unpressured buyer and seller, given adequate market exposure. This is what appraisers estimate. Market price: the actual price a property sold for in a specific transaction — may differ from value if buyer or seller was under duress, uninformed, or related parties. Cost: the amount spent to build or acquire the property — may be more or less than value. Example: overbuilt property cost $500,000 to build but market value is only $380,000 (functional obsolescence). Cost ≠ Value.