Proven mnemonics — built specifically for the real estate licensing exam.
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4 Elements of Value
DUST
Demand · Utility · Scarcity · Transferability
All 4 elements must be present for a property to have value
DUST is foundational to real estate valuation — if any one element is missing, value cannot exist. A property in a flood zone may have Utility and Transferability but lack Demand. An oil field may have Demand and Scarcity but lack Transferability if it can't be sold. All four must work together.
D
Demand — desire and ability to purchase at a given price
U
Utility — usefulness, the ability to satisfy a need or desire
S
Scarcity — limited supply relative to demand
T
Transferability — ability to convey ownership to another party
Forces Influencing Value
PEPS
Physical/environmental · Economic · Political (governmental) · Social
4 external forces that influence real estate value
Real estate value doesn't exist in a vacuum — PEPS reminds you that four external forces are always at work. A great property in a bad location (Physical), during a recession (Economic), in a high-tax area (Political), or in a declining neighborhood (Social) will suffer in value regardless of its condition.
P
Physical and environmental — location, topography, climate, natural features
E
Economic — employment, income levels, interest rates, market trends
P
Political (governmental) — zoning, taxes, building codes, regulations
S
Social — population trends, lifestyle preferences, community standards
Fixed and variable operating expenses of real estate investment
TIMMUR covers all the operating expenses you subtract from gross income to get Net Operating Income (NOI). Remember: mortgage payments are NOT an operating expense — they are a financing cost. NOI = Gross Income minus Vacancy minus TIMMUR expenses.
T
Taxes — property taxes (fixed expense)
I
Insurance — property and liability insurance (fixed)
M
Management — property management fees (variable)
M
Maintenance — repairs and upkeep (variable)
U
Utilities — if landlord pays (variable)
R
Reserves — replacement reserves for major systems (fixed)
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.
🏡 Valuation
COSI — Cost, Sales, Income
Three Appraisal Approaches
The three ways an appraiser determines property value
Every appraisal question uses one of these three approaches. COSI helps you remember all three and when each is used.
C
Cost Approach — land value + rebuild cost minus depreciation. Best for new/unique properties.
S
Sales Comparison — compares to recent similar sales (comps). Best for homes.
I
Income Approach — NOI ÷ Cap Rate. Best for investment properties.
🏡 Valuation
PFE — "Please Fix Everything"
Three Types of Depreciation
Depreciation reduces value — three types tested on every exam
"Please Fix Everything" — that's what depreciation means for a property.
P
Physical — wear and tear, aging. Usually curable.
F
Functional — outdated features. May be curable or incurable.
E
Economic — outside factors (airport, bad neighborhood). Always incurable.
🏡 Valuation
Substitution: "Why pay more?"
Principle of Substitution
The foundation of the sales comparison approach
A buyer won't pay more than the cost of an equally desirable substitute. This is why comps work. The principle of substitution drives the entire sales comparison approach.
🏡 Valuation
CBS — Comparable Better, Subtract
Sales Comparison Adjustments
The #1 mistake on sales comparison questions
Comp BETTER than subject → SUBTRACT from comp. Comp WORSE than subject → ADD to comp. Always adjusting the comparable to match the subject property.