Proven mnemonics — built specifically for the real estate licensing exam.
Three Approaches to Value
Three appraisal approaches: COSI — Cost, Sales comparison (Market), Income
Three Approaches to Value
Every licensed appraiser uses one or more of these three methods
Cost approach: what would it cost to rebuild minus depreciation plus land value. Used for unique properties, new construction, special purpose buildings. Sales comparison (market) approach: compare to recent sales of similar properties — most common for residential. Income approach: value based on income generated — used for investment properties.
C
Cost approach — rebuild cost minus depreciation
S
Sales comparison — compare to recent sales
I
Income approach — based on income generated
CMA vs Appraisal
CMA: Comparative Market Analysis — not a formal appraisal but used to set listing price
CMA vs Appraisal
Two different valuations — and who does each
CMA: done by a real estate agent, not a licensed appraiser. Uses recent sales, active listings, and expired listings of similar properties. Used to help sellers set a realistic listing price or buyers make competitive offers. Formal appraisal: done by licensed appraiser, required by lenders, legally defensible.
Physical deterioration: wear and tear, deferred maintenance — can be curable (paint) or incurable (foundation). Functional obsolescence: outdated features (one bathroom in a 4-bedroom home, outdated floor plan) — can be curable or incurable. Economic/external obsolescence: outside the property (new highway nearby, plant closure) — always incurable.
Physical
Wear and tear — curable or incurable
Functional
Outdated features — curable or incurable
Economic
External factors — always incurable
Capitalization Rate
Cap rate = NOI ÷ Value. Higher cap rate = higher risk/return. Lower cap rate = lower risk.
Capitalization Rate
The key formula for valuing income-producing properties
Cap rate (Capitalization rate) = Net Operating Income ÷ Property Value. Rearrange: Value = NOI ÷ Cap rate. If NOI = $50,000 and cap rate = 5%, Value = $1,000,000. Higher cap rate: riskier investment or lower-quality area. Lower cap rate: safer investment or premium location.
Net Operating Income
NOI = Gross income - Vacancy - Operating expenses (NOT including mortgage payments)
Net Operating Income
What NOI includes and what it deliberately excludes
Gross potential income (all units full) minus Vacancy and credit loss minus Operating expenses (taxes, insurance, maintenance, management, utilities) = NOI. DOES NOT include mortgage payments (debt service) — NOI is used before financing to compare properties on equal footing.
A quick and simple income property comparison tool
GRM = Sales price ÷ Gross monthly rent (or annual). To find value: Value = GRM × Monthly rent. Less accurate than cap rate because it ignores expenses and vacancy. Used as a quick screening tool. Example: property sells for $300,000, rents for $2,000/month → GRM = 150.
Principle of Substitution
Principle of substitution: a buyer won't pay more than the cost of an equally desirable alternative
Principle of Substitution
The foundation of the sales comparison approach
A rational buyer will not pay more for a property than the cost of acquiring a comparable substitute. This principle underlies the sales comparison approach. Sets the ceiling on value. Related: principle of contribution (a feature is worth what it adds to the whole, not what it costs).
Highest and Best Use
Highest and best use: legal, physically possible, financially feasible, maximally productive
Highest and Best Use
Four tests a use must pass to be considered highest and best use
Appraisers must determine the highest and best use of a site — the use that produces the highest value. Must be: Legally permissible (zoning), Physically possible (soil, size, shape), Financially feasible (demand exists), Maximally productive (produces highest return). May differ from current use.
L
Legally permissible
P
Physically possible
F
Financially feasible
M
Maximally productive
Market Value vs Price
Market value vs Market price: value = what it's WORTH. Price = what it SOLD for.
Market Value vs Price
A distinction appraisers make carefully
Market value: the most probable price a property would sell for in a competitive, open market with informed buyers and sellers and no unusual pressures. Market price: what it actually sold for — may be above or below market value. Cost: what was spent to build it. All three can be different.
Reconciliation
Reconciliation: appraiser weighs all three approaches and gives final value opinion
Reconciliation
The final step in the appraisal process
Appraiser doesn't average the three approaches — they weight each based on reliability for that property type. For a single-family home: sales comparison usually weighted most heavily. For an apartment building: income approach. For a special-use property: cost approach. Final value is a single point estimate.
Appraisal vs Assessment
Appraisal vs Assessment: appraisal for market value. Assessment for property tax purposes.
Appraisal vs Assessment
Two different valuations — often confused on the exam
Appraisal: professional opinion of market value, usually for mortgage lending. Done by licensed appraiser. Assessment: value placed on property by county assessor for property tax purposes. Often different from market value. Assessment ratio: assessed value ÷ market value. Ad valorem tax: based on property value.
Plottage and Assemblage
Plottage: combining multiple parcels increases total value beyond sum of parts
Plottage and Assemblage
How combining properties creates extra value
Assemblage: the process of combining two or more adjacent parcels into one larger parcel. Plottage: the increase in value that results from assemblage. Example: three 50×100 lots worth $100,000 each → combined 150×100 lot worth $400,000 (plottage value = $100,000). Developer can build something not possible on individual lots.