CONCEPTS of VALUECONCEPTS of VALUE

FACTORS OF VALUEFACTORS OF VALUE

• UTILITY– THE ABILITY OF A PRODUCT TO SATISFY

HUMAN WANTS. RELATES TO THE DAMAND SIDE OF THE MARKET.

• SCARCITY– THE PRESENT OR ANTICIPATED SUPPLY OF

AN ITEM RELATIVE TO THE DEMAND. RELATES TO THE SUPPLY SIDE OF THE MARKET.

• DESIRE– THE PURCHASER’S WISH FOR AN

ITEM. DEMAND SIDE OF THE MARKET.

• EFFECTIVE PURCHASING POWER– THE ABILITY OF AN INDIVIDUAL OR

GROUP TO PARTICIPATE IN THE MARKET. DEMAND SIDE OF THE MARKET.

ECONOMIC PRINCIPLES ECONOMIC PRINCIPLES RELATIVE TO APPRAISALRELATIVE TO APPRAISAL

1. ANTICIPATION:

THE PERCEPTION THAT VALUE IS CREATED BY THE EXPECTATION OF BENEFITS TO BE DERIVED IN THE FUTURE.

VALUE IS BASED ON THE MARKET PARTICIPANT’S PERCEPTION OF FUTURE BENEFITS OF OWNERSHIP.

2. CHANGE:

THE RESULT OF THE CAUSE AND EFFECT RELATIONSHIP AMONG THE FORCES THAT INFLUENCE REAL PROPERTY VALUE.

CHANGE IN THE MARKET FOR REAL ESTATE DUE TO SOCIAL, ECONOMIC, GOVERNMENTAL, AND ENVIRONMENTAL FORCES.

DEPRECIATION - LOSS IN PROPERTY VALUE FROM ANY CAUSE.

3. SUPPLY AND DEMAND:

THE INTERACTION OF THE SUPPLY AND DEMAND RELATIONSHIPS FOR REAL ESTATE IN PRICE DETERMINATION.

RELATES TO THE FACTORS OF VALUE - UTILITY, SCARCITY, DESIRE, AND EFFECTIVE PURCHASING POWER.

• IN REAL ESTATE, SUPPLY IS THE AMOUNT OF A CERTAIN TYPE OF PROPERTY AVAILABLE FOR SALE OR LEASE AT VARIOUS PRICES IN A GIVEN MARKET AT A GIVEN TIME.

• THE SUPPLY OF RURAL LAND REFERS TO THE AMOUNT OF LAND SUITABLE FOR A SPECIFIC USE, RATHER THAN THE TOTAL NUMBER OF AVAILABLE ACRES.

• IN REAL ESTATE, DEMAND IS THE AMOUNT OF A TYPE OF PROPERTY DESIRED FOR PURCHASE OR LEASE AT VARIOUS PRICES IN A GIVEN MARKET AT A GIVEN TIME.

• BECAUSE THE SUPPLY OF REAL PROPERTY FOR SPECIFIC USES CANNOT BE ADJUSTED IMMEDIATELY, VALUES ARE MOST AFFECTED BY CURRENT DEMAND.

4. 4. COMPETITIONCOMPETITION

• EXPRESSES THE PRINCIPAL OF THE FREE ENTERPRISE SYSTEM

• ABNORMAL PROFITS CANNOT BE EXPECTED TO CONTINUE INDEFINITELY INTO THE FUTURE

5. SUBSTITUTION:

WHEN SEVERAL SIMILAR GOODS OR SERVICES ARE AVAILABLE, THE ONE WITH THE LOWEST PRICE ATTRACTS THE GREATEST DEMAND.

A BUYER WILL NOT PAY MORE FOR ONE PROPERTY THAN FOR ANOTHER THAT IS EQUALLY DESIRABLE.

PROPERTY VALUES TEND TO BE SET BY THE COST OF ACQUIRING AN EQUALLY DESIRABLE SUBSTITUTE PROPERTY.

RECOGNIZES THAT BUYERS AND SELLERS OF REAL PROPERTY HAVE OTHER OPTIONS, i.e., OTHER PROPERTIES ARE AVAILABLE FOR SIMILAR USES.

FUNDAMENTAL TO ALL THREE APPROACHES TO VALUE, BUT IS THE BACK BONE OF THE SALES COMPARISON APPROACH.

6. OPPORTUNITY COST:

THE COST OF OPTIONS FORGONE OR OPPORTUNITIES NOT CHOSEN.

INVESTORS WILL SEEK TO SELECT INVESTMENTS THAT PROVIDE THE HIGHEST RATE OF RETURN AT THE LOWEST LEVEL OF RISK.

IN OTHER WORDS - INVESTORS SEEK TO MAXIMIZE RETURNS, YET ARE RISK AVERSE.

RELATED TO THE PRINCIPLE OF SUBSTITUTION, AND IS RELATIVE TO THE INCOME APPROACH.

• OPPORTUNITY COSTS ARE ESPECIALLY SIGNIFICANT IN ESTIMATING THE RATES OF RETURN REQUIRED TO ATTRACT CAPITAL.

• THE CAPITALIZATION RATE, WHICH IS THE INDICATED REQUIRED RATE OF RETURN BY THE MARKET FOR THE TYPE OF PROPERTY BEING APPRAISED.

7. BALANCE:

REAL PROPERTY VALUE IS CREATED AND SUSTAINED WHEN CONTRASTING, OPPOSING, OR INTERACTING ELEMENTS ARE IN A STATE OF EQUILIBRIUM.

MAXIMUM BENEFITS MAY BE OBTAINED WHEN ALL FACTORS OF PRODUCTION ARE IN EQUILIBRIUM, i.e., WHEN MARGINAL COSTS EQUAL THE MARGINAL BENEFITS OF A PRODUCTION INPUT.

8. CONTRIBUTION:

THE VALUE OF A PARTICULAR COMPONENT IS MEASURED IN TERMS OF ITS CONTRIBUTION TO THE VALUE OF THE WHOLE PROPERTY, OR THE AMOUNT THAT ITS ABSENCE WOULD DETRACT FROM THE VALUE OF THE WHOLE.

RELATES TO THE COST APPROACH AND SALES COMPARISON APPROACH

9. SURPLUS PRODUCTIVITY:

THE NET INCOME THAT REMAINS AFTER THE COSTS OF VARIOUS AGENTS OF PRODUCTION HAVE BEEN PAID.

RELATES TO THE INCOME APPROACH.

AGENTS OF PRODUCTION:

• LAND

• LABOR

• CAPITAL

• MANAGEMENT

10. CONFORMITY:

REAL PROPERTY VALUE IS CREATED AND SUSTAINED WHEN THE CHARACTERISTICS OF A PROPERTY CONFORM TO THE DEMANDS OF ITS MARKET.

ZONING ORDINANCES ESTABLISH CONFORMITY IN BASIC PROPERTY CHARACTERISTICS.

11. EXTERNALITIES:

OUTSIDE FORCES THAT EFFECT PROPERTY VALUES.

ECONOMIES OUTSIDE A PROPERTY HAVE POSITIVE EFFECTS ON ITS VALUE.

WHILE DISECONOMIES HAVE A NEGATIVE EFFECT ON VALUE.

EXTERNALITIES SUCH AS THE NEIGHBORHOOD HAVE AN EFFECT ON VALUE.

12. HIGHEST AND BEST USE:

THE REASONABLY PROBABLE AND LEGAL USE OF VACANT LAND OR IMPROVED PROPERTY, WHICH IS PHYSICALLY POSSIBLE, APPROPRIATELY SUPPORTED, FINANCIALLY FEASIBLE, AND THAT RESULTS IN THE HIGHEST VALUE.

A FUNDAMENTAL CONCEPT IN REAL ESTATE APPRAISAL.

HIGHEST AND BEST USE OF LAND AS THOUGH VACANT:

AMONG ALL REASONABLE, ALTERNATIVE USES, THE USE THAT YIELDS THE HIGHEST PRESENT LAND VALUE, AFTER PAYMENTS ARE MADE FOR LABOR, CAPITAL, AND MANAGEMENT, IS GENERALLY REGARDED AS THE HIGHEST AND BEST USE OF THE LAND AS THOUGH VACANT.

HIGHEST AND BEST USE OF LAND AS IMPROVED:

IMPLIES THAT THE EXISTING IMPROVEMENT SHOULD BE RENOVATED OR RETAINED AS IS SO LONG AS IT CONTINUES TO CONTRIBUTE TO THE TOTAL MARKET VALUE OF THE PROPERTY, OR UNTIL THE RETURN FROM A NEW IMPROVEMENT WOULD MORE THAN OFFSET THE COST OF DEMOLISHING THE EXISTING IMPROVEMENT AND CONSTRUCTING A NEW ONE.

FORCES THAT INFLUENCE FORCES THAT INFLUENCE REAL PROPERTY VALUESREAL PROPERTY VALUES

SOCIAL FORCES

DEMOGRAPHIC COMPOSITION OF THE POPULATION.

AGE, FAMILY SIZE, ETC.

ECONOMIC FORCES

MARKET CHARACTERISTICS SUCH AS INCOME, EMPLOYMENT, AVAILABILITY AND COST OF CREDIT, ETC.

GOVERNMENTAL FORCES

POLITICAL AND LEGAL ACTIONS.

PUBLIC SERVICES, ZONING, BUILDING CODES, ETC.

ENVIRONMENTAL FORCES

LOCATION. LOCATION. LOCATION.

LOCATION IS THE TIME-DISTANCE RELATIONSHIP BETWEEN A PROPERTY AND ITS NEIGHBORHOOD.

REAL ESTATE MARKETSREAL ESTATE MARKETS

REAL ESTATE MARKETS

• DIFFERENTIATED BY:

(1) GEOGRAPHIC LOCATIONNEIGHBORHOOD, CITY, REGION

(2) TYPE OF REAL ESTATE

TYPES OF REAL ESTATE MARKETSTYPES OF REAL ESTATE MARKETS

• RESIDENTIAL

• COMMERCIAL

• INDUSTRIAL

• AGRICULTURAL

• SPECIAL-PURPOSE

ARE REAL ESTATE MARKETS EFFICIENT?• AN EFFICIENT MARKET MAY BE DEFINED AS

ONE WHERE PRICES FULLY AND INSTANTANEOUSLY REFLECT ALL AVAILABLE RELEVANT INFORMATION.

• EFFICIENT MARKETS GENERALLY HAVE LARGE NUMBERS OF BUYERS AND SELLERS WHO CREATE A COMPETITIVE MARKET.

• BUYERS AND SELLERS ARE KNOWLEDGEABLE AND FULLY INFORMED ABOUT MARKET CONDITIONS.

REAL ESTATE MARKETS ARE NOT EFFICIENT.

IMPERFECTIONS SUCH AS THE LACK OF PRODUCT STANDARDIZATION, AND THE TIME REQUIRED TO PRODUCE NEW SUPPLY, MAKE IT DIFFICULT TO PREDICT THE BEHAVIOR OF REAL ESTATE MARKETS ACCURATELY.

MARKET ANALYSISMARKET ANALYSIS

• THE IDENTIFICATION AND STUDY OF THE MARKET FOR A PARTICULAR ECONOMIC GOOD OR SERVICE.

• FORMS THE BASIS FOR DETERMINING THE HIGHEST AND BEST USE OF A PROPERTY.

• MARKET VALUE OF A PROPERTY IS LARGELY A FUNCTION OF ITS COMPETITIVE POSITION IN ITS MARKET.

• MARKET ANALYSIS PROVIDES AN APPRAISER WITH INFORMATION ABOUT CURRENT BUILDING COSTS AND MARKET CONDITIONS FOR USE IN THE COST APPROACH.

• MARKET ANALYSIS HELPS IDENTIFY COMPETITIVE PROPERTIES AND THEIR DEGREE OF COMPARABILITY IN THE SALES COMPARISON APPROACH.

• MARKET ANALYSIS PROVIDES INFORMATION USED TO DETERMINE THE ANTICIPATED LEASE OR RENTAL RATE OF A PROPERTY, FUTURE INCOME FLOWS, AND APPROPRIATE DISCOUNT RATE TO APPLY IN THE INCOME APPROACH.