As you prepare to take the real estate exam, you'll want to be studying a variety of topics and terms to ensure you’re ready when the exam day comes. The appraisal process is heavily tested on the real estate exams, with about 14% of questions asking about property valuations and appraisals. Real estate agents are expected to guide their clients through the appraisal process, so knowing this topic is key to your success as an agent. As you study, make sure to know these ten terms to ace your real estate exam.
What is an Appraisal?
An appraisal is a third-party professional opinion on the value of the property. This is generally done to ensure that the value of the property is in line with how much it’s being purchased for and guarantees the bank that it’s being purchased for a fair price. The appraisal helps the lender protect itself against overfunding and ensures that the price is reasonable for the seller. Usually, the buyer will pay for the appraisal once under contract on the house. However, it’s generally not required for all cash offers unless the buyer specifically requests it.
What are Comparables? A comparable, often referred to as a comp, is a valuation of a property according to a study of similar properties in the area that you’re looking to buy or sell in. A comp is used to determine the home’s value based on surrounding properties that have recently sold and can indicate the appropriate value of your property. For buyers, comps are helpful to ensure you’re putting in a competitive offer on the house. For sellers, they provide clear pricing parameters for how much your home is worth. Comps consider things like the size of the property, the year it was built, and the property’s features. Real estate agents use comparable to help sellers list their property at an appropriate price and help buyers make an appropriate offer.
What is a Drive-By Appraisal? A drive-by appraisal is sometimes used in real estate to determine the home’s value. While not as in-depth as a full appraisal, a drive-by appraisal mainly evaluates the house’s exterior. An appraiser will visit the house, make notes and take photos of the home’s exterior, and make a valuation call based on its street value. Depending on the current market and the property you’re purchasing, your lender may feel comfortable with just ordering a drive-by appraisal versus a full appraisal.
What is an Appraisal Report? An appraisal report is the written overview of the appraiser’s findings. This generally includes detailed results of similar properties in the area that have sold, a valuation of the property, and how the neighborhood will impact the home’s future value. This overview will outline precisely how the appraiser came to their conclusions and cite the corresponding evidence associated with the report, like photos and data.
What is a Trade Fixture? Trade fixtures outline personal property items that a tenant would install or use to operate their business in commercial real estate. For example, restaurant booths inside a restaurant would fall under trade fixtures that the tenant installed to conduct their business. Unlike a regular fixture, these fixtures do not become a landlord’s property when the lease expires. A regular fixture is an item that becomes the landlord’s property after the tenant's lease expires.
What Does Ad Valorem Mean? The Latin phrase ad valorem means “based on value.” In terms of real estate, an ad valorem tax is a tax based on a property’s value — often in the form of a personal property tax. These taxes are generally instituted by local governments and are assessed annually by the jurisdiction. These are usually the primary source of income for municipal governments and are essential to consider when purchasing a home.
What is a Sales Comparison Approach? A sales comparison approach is a standard real estate appraisal practice that compares one property to other recently sold properties with similar characteristics. Many in the industry use this method to determine how individual features on the house make up the home’s overall value. The sales comparison approach considers factors like the size of the house, location, other sold listings, price per square foot, condition, and age of the house.
What is an Income Approach? In the income approach, an appraiser determines the property’s value based on the income the property generates. This is frequently used in multi-family housing or investment properties and considers factors like occupancy rates, operating efficiency, and condition of the property. This is also called income capitalization.
What Does Depreciation Mean? Depreciation is the decrease of the home’s value. A few factors are considered when calculating depreciation — physical depreciation, functional obsolescence, and economic obsolescence. Physical depreciation refers to the decline of the property’s value over time due to time, elements, and usage. For example, natural weathering and decay would be considered physical depreciation. Functional obsolescence is when deficiencies or undesirable aspects of the building decrease its value, such as historic architecture or outdated facilities. Lastly, economic obsolescence is a decrease in property value due to a change in surrounding or local economics and often has nothing to do with the property itself.
What is Zoning? Zoning is the division of land by the local government. These laws are local regulations that dictate how the land can be used. These decisions are based on a master plan for the district and consider a variety of factors like economic development, traffic concerns, noise or light levels, and protecting local resources.
There are multiple zoning classifications, but some of the most common include commercial, residential, agricultural, hospitality, or industrial. Zoning laws can impact property value and what type of building or structure can be built on a property.
Final Thoughts on these 10 Appraisal Terms Since appraisal questions will show up multiple times on your real estate exam, it’s important to understand the key terms and phrases and how they’re used in the business. Consider using a popular study tool like flashcards or study guides to make sure you understand the subject matter. With proper preparation, you’ll be able to breeze through these appraisal questions!