Appraisal

A professional estimate of what a property would sell for, reconciling comparable sales with a capitalisation of the income and adjusting for what the comparables did not match.

Example

Two competent appraisers valuing the same unit in the same week at 298,500 and 284,000, one leaning on comparables and one on income.

Important

It is an opinion about a transaction that has not happened, built on evidence months old. A share price is a fact about a transaction that did. Treating the two as the same kind of statement is how a portfolio comes to believe it is steadier than it is.

Related terms

• Comparable sale — A recent recorded transaction in a similar nearby property, used as evidence of what the subject property is worth.
• Appraisal smoothing — The understatement of measured volatility and correlation that arises when an asset is valued periodically by estimate, each estimate anchored partly to the previous one, rather than being traded continuously.
• Valuation — An estimate of what an asset is worth, as distinct from the price it currently trades at. Built from what the asset produces plus judgements about growth, duration and required return.

Lessons that explain it

• A price is a guess between two auction estimates until a hammer actually falls — There is no continuous market here - only comparable sales, an appraiser's estimate, and an auction reserve that can fail to be met. The gap between what an item is 'worth' and what it actually sells for can be wide, and it is measured only at the moment of an actual transaction. (12 min)
• No closing bell: comparables, appraisal and the cap rate — Nothing quotes this asset. Its price comes from three negotiated sales that happened months ago, adjusted by somebody's judgement - and from an income lens that is more honest and much less popular. (11 min)

All 578 terms in the Investing glossary