Definitions and Key Concepts
Appraisal is the process of evaluating a property’s monetary value. It is underpinned by various critical concepts and definitions.
1. Market Value: This is the probable price at which a property would trade in a competitive, open market environment. It assumes a “willing buyer and willing seller”, and accounts for the property’s highest and best use, which is the property’s most profitable legal use.
2. Appraisal Methods: Three main methods are used, namely the Cost Approach, the Sales Comparison Approach, and the Income Capitalization Approach. The Cost method focuses on the replacement cost of the structure; the Sales Comparison trick bases its assessment on the price of recently sold, similar properties, while the Income Capitalization technique estimates the present value of the expected future cash flows from the property.
3. Rights and Interests: Evaluations consider rights such as possession, control, exclusion and disposition, and can focus on types of interests like fee simple, life estate, leasehold, or leasable fee.
4. Depreciation: This covers the physical deterioration, functional obsolescence, and economic obsolescence of the building, all contributing to its depreciation.
5. Location: The site’s desirability, accessibility, and neighborhood characteristics count in the property valuation.
These key concepts are valuable in understanding the diverse scope and aspects of real estate appraisal.
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