Unit 16: Appraisal

Real Estate Appraisal

8 exam questionsHigh Priority

Appraisal approaches, value principles, and appraisal process.

Quick Explanation

5 min read

Appraisal determines market value using 3 approaches: Sales Comparison (residential), Cost Approach (new/special use), and Income Approach (investment property). The principle of substitution is the foundation of all three approaches.

Key Points — What Matters for the Exam

3 Approaches: Sales Comparison, Cost Approach, Income Approach

Sales Comparison = best for residential (uses comparable sales)

Cost Approach = best for new construction or special-use properties

Income Approach = best for investment/income-producing properties

Cap Rate = NOI ÷ Value; Value = NOI ÷ Cap Rate

Highest and Best Use = legally permissible, physically possible, financially feasible, maximally productive

Functional Obsolescence = outdated design within the property

External Obsolescence = factors OUTSIDE the property (only incurable type)

Memory Trick

SCI = the 3 appraisal approaches: Sales comparison, Cost, Income. 'Smart Careful Investors use all three.' External obsolescence is always incurable (you can't fix what's outside).

Common Trap Answers — Don't Fall For These

External obsolescence is ALWAYS incurable (it's outside the property)

Cap rate and value move in OPPOSITE directions (higher cap rate = lower value)

Highest and Best Use must meet ALL 4 criteria

Key Terms for This Unit (4)

Cap Rate

Net Operating Income ÷ Property Value. Used in income approach. Higher cap rate = lower value.

Highest and Best Use

The use that is legally permissible, physically possible, financially feasible, and maximally productive.

Functional Obsolescence

Loss in value due to outdated or poor design features within the property.

Principle of Substitution