The economic concepts underlying appraisal. See under principle of: anticipation, balance, change, conformity, contribution, and substitution. See also competition; demand; highest and best use; and variable proportions, law of.

The appraisal principle that value depends on the expectation of benefits to be derived in the future.

The principle of balance as used in appraising is that the greatest value in property will occur when the type and size of improvements and uses are proportional to each other as well as to the land.

The principle of change asserts that all markets are in a continual state of change. According to this principle, properties generally go through the three stages of integration (development), equilibrium (stasis), and disintegration (decline).

The principle of conformity states that the value of a group of properties will rise to its highest possible level in an area where architectural styles are reasonably homogeneous and surrounding land uses are compatible with the use of the specified properties.

The principle of contribution requires an appraiser to measure the value of any improvement to a property by the amount it contributes to market value, not by its cost.

The principle of progression holds that the worth of an inferior property is increased by its proximity to better properties of the same use class.

The appraisal principle that states that a potential owner will pay no more for a property than the amount for which a property of like utility may be purchased; that a property's value tends to be set by the cost of acquiring an equally desirable substitute. The principle of substitution states that no buyer will pay more for a good than he or she would have to pay to acquire an acceptable substitute of equal utility in an equivalent amount of time.

Accuracy. The closeness of a measurement, computation, or estimate to the true, exact, or accepted value. Accuracy also can be expressed as a range about the true value. See also precision and statistical accuracy.

A computer-oriented, precisely defined set of steps that, if followed exactly, will produce a pre-specified result, for example, the solution to a problem.

The three methods of appraisal, that is, the cost approach, income approach, and sales comparison approach.

(1) In a mathematical expression, a number or letter preceding and multiplying another quantity. For example, in the expression, 5X, 5 is the coefficient of X, and in the expression aY, a is the coefficient of Y. (2) A dimensionless statistic, useful as a measure of change or relationship; for example, correlation coefficient. See also coefficient of dispersion and coefficient of variation.

The average deviation of a group of numbers from the median expressed as a percentage of the median. In ratio studies, the average percentage deviation from the median ratio.

This concept involves the development of value based on analysis of similar (but not identical) properties using some measure of utility (such as size or capacity) as the basis of comparison. For example, when appraising an engine lathe manufactured by Company A, the appraiser has comparables of other similar engine lathes of the same size manufactured by Companies B and C. Obviously, Compared to a direct match, this technique becomes more subjective, which requires additional analysis of the elements of comparison.

(1) Recently sold properties that are similar in important respects to a property being appraised. The sale price and the physical, functional, and locational characteristics of each of the properties are Compared to those of the property being appraised in order to arrive at an estimate of value. (2) By extension, the term "comparables" is sometimes used to refer to properties with rent or income patterns comparable to those of a property being appraised.

Market value is the major focus of most real property appraisal assignments. Both economic and legal definitions of market value have been developed and refined. A current economic definition agreed upon by agencies that regulate federal financial institutions in the United States is: The most probable price (in terms of money) which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: The buyer and seller are typically motivated; Both parties are well informed or well advised, and acting in what they consider their best interests; A reasonable time is allowed for exposure in the open market; Payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

A study of the relationship between appraised or assessed values and market values. Indicators of market values may be either sales (sales ratio study) or independent "expert" appraisals (appraisal ratio study). Of common interest in ratio studies are the level and uniformity of the appraisals or assessments. See also level of appraisal and level of assessment.

The coefficient calculated by the regression algorithm for the data supplied that, when multiplied by the value of the variable with which it is associated, will predict (for simple regression) or help to predict (for multiple regression) the value of the dependent variable. For example, in the equation, Value = $10,000 + $5,000 + number of rooms, $5,000 is a regression coefficient.

Repeat sales analysis (see Section 4.4: Time Series Analysis) aggregates changes in value and statistical means for properties sold more than once during a specified period of time in a given geographic area. For example, in a zip or postal code area, estimate market-level housing price changes. If an individual property has not been substantially changed since its last sale, this analysis matches each pair of sales transactions (thus the name “repeat sales”). The amount of appreciation (or depreciation) is calculated from the time of the first sale to the second and so on, providing an estimate of the overall appreciation of that local housing market during that time period. The larger the number of available sales pairs, the more statistically reliable the estimate of overall housing price trends will be. Because this analysis is based on identifying properties where more than one sale has occurred, the challenge is to identify enough observations to provide a meaningful index of housing values, while keeping to as small a geographic area as possible. A repeat sales index may also overestimate market appreciation if the data contains pairs of sales in which the second sales price reflects substantial improvements (or other alterations) made to the property after the first sale. On the other hand, repeat sales indices can and do provide very useful valuation estimates in jurisdictions where the data is insufficient to support hedonic models. In addition, they may prove to be more accurate in tracking housing values for the houses that a hedonic model may struggle with (especially those subject to extreme positive or negative influences) when a prior sale is known on the property.

Sales chasing is the practice of using the sale of a property to trigger a reappraisal of that property at or near the selling price. If sales with such appraisal adjustments are used in a ratio study, the practice causes invalid uniformity results and causes invalid appraisal level results, unless similar unsold parcels are reappraised by a method that produces an appraisal level for unsold properties equal to the appraisal level of sold properties. (2) By extension, any practice that causes the analyzed sample to misrepresent the assessment performance for the entire population as a result of acts by the assessor’s office. A subtle, possibly inadvertent, variety of sales chasing occurs when the recorded property characteristics of sold properties are differentially changed relative to unsold properties. Then the application of a uniform valuation model to all properties results in the recently sold properties being more accurately appraised than the unsold ones.

A ratio study that uses sales prices as proxies for market values.

The closeness between the statistical estimate and the true (but unknown) population parameter value it was designed to measure. It is usually characterized in terms of error or the potential significance of error and can be decomposed into sampling error and non sampling error components. Accuracy can be specified by the level of confidence selected for a statistical test. See also accuracy.

(1) Numerical descriptions calculated from a sample, for example, the median, mean, or coefficient of dispersion. Statistics are used to estimate corresponding measures, termed parameters, for the population. (2) The science of studying numerical data systematically and of presenting the results usefully. Two main branches exist: descriptive statistics and inferential statistics.

A convenient way to group the various methods of appraising a property. The cost approach encompasses several methods for estimating replacement cost new of an improvement less depreciation plus land value. The sales comparison approach estimates values by comparison with similar properties for which sales prices are known. The methods included in the income approach are based on the assumption that value equals the present worth of the rights to future income.

A family of techniques that can be used to measure the cyclical movements, random variations, seasonal variations, and secular trends observed over a period of time.

An average in which each value is adjusted by a factor reflecting its relative importance in the whole before the values are summed and divided by their number.