Real Estate Appraisal Principles and Procedures
Foundations of the Appraisal Discipline
Appraisal rests on a body of economic principles and a repeatable process. Candidates must know the principles: supply and demand, substitution, highest and best use, conformity, progression and regression, anticipation, contribution, balance, and externalities. The principle of substitution underpins the sales comparison and cost approaches; contribution explains why a feature is worth only what it adds to value; anticipation drives income capitalization.
The Appraisal Process
Know the ordered steps: define the problem (identify client, intended use, purpose, definition of value, effective date, scope of work, and property rights), gather and analyze data, apply the three approaches, reconcile to a final opinion, and report. The trap is confusing the effective date with the report date, or the client with the intended user. Another common trap: applying an approach that is not applicable and then failing to justify its omission in the scope of work.
Worked Rule of Thumb
Regression example: a subject worth $300,000 sits beside a $360,000 house. If the market shows a 5% value penalty for inferior neighbors, the indicated adjustment is roughly $15,000 downward influence on the subject's comparable positioning. Always adjust the comparable toward the subject, never the reverse.
Exam Traps
Watch for questions that swap value in use with market value, or investment value with market value. Investment value is specific to one investor; market value assumes a typical buyer. Also distinguish price, cost, and value-cost is historical, price is transactional, value is prospective.