Re appr unit 4

Unit 4: Value and Economic Principles

 What is Value?
• Introduction
o Value has been defined as the monetary worth of a
property, good, or service to buyers and sellers at a
given time.
o An item is valuable because people perceive it has
worth.
• Price
o Once stated, price is a fact.
o A price, once finalized, represents the amount a
particular purchaser agrees to pay and a particular
seller agrees to accept under the circumstances
surrounding their transaction.

 What is Value? (continued)
• Introduction
o Value has been defined as the monetary worth of a property,
good, or service to buyers and sellers at a given time.
o An item is valuable because people perceive it has worth.
• Price
o Once stated, price is a fact.
o A price, once finalized, represents the amount a particular
purchaser agrees to pay and a particular seller agrees to
accept under the circumstances surrounding their
transaction.
• Cost
o Cost is the total dollar expenditure to develop an
improvement and applies to either reproduction of an
identical improvement or replacement with a functional
equivalent.

 Four Elements that Create Value
• Introduction
o For real property to have value, four elements must be
present: (1) the property must be in demand, (2) it must
have usefulness or utility, (3) there must be a degree of
scarcity, and (4) it must be possible to transfer it legally in
title or use.
• Demand
o Demand is desire or ability to purchase a commodity.
o Effective demand is desire coupled with the ability to satisfy
the desire.
• Utility
o Utility is the ability or power of an item to perform a service
or meet a need.

 Four Elements that Create Value (continued)
• Scarcity
o The term scarcity refers not just to a shortage of an
item, but a shortage of an item relative to the demand
for that item.
o When scarcity combines with the other three elements
(demand, utility, and transferability), value is enhanced
immensely.
• Transferability
o Transferability refers to the ability to transfer
ownership of an item from one person, or entity, to
another.
o This includes both possession and control.

 Factors Impacting Value (continued)
• Introduction
o In addition to the four elements that create value,
other factors impact value, both positively and
negatively.
o These factors are classified according to their source—
physical and environmental, economic, governmental,
and social.
o Physical Characteristics and Environmental Forces
 Physical characteristics and environmental forces include
the property’s location, the surrounding climate, its
topography and soil composition, the size and shape of
the property, and the ease of navigation.

• Introduction
o In addition to the four elements that create value,
other factors impact value, both positively and
negatively.
o These factors are classified according to their source—
physical and environmental, economic, governmental,
and social.
• Physical Characteristics and Environmental Forces
o Physical characteristics and environmental forces
include the property’s location, the surrounding
climate, its topography and soil composition, the size
and shape of the property, and the ease of navigation.

o Location
 Unlike other types of assets, land cannot be moved, so its
location has an impact on its value.
 The term front foot defines the width of a property along a
street or other boundary.
 A building’s orientation on the lot in relation to exposure to
the sun, prevailing wind, traffic, and accessibility from the
street can dramatically affect value as well.
o Climate
 Climatic conditions including snowfall, rainfall, humidity,
temperature, topography, soil conditions, and prevailing
winds are items of consideration that can promote, or hinder
areas.

o Topography and Soil
 Topography affects both the desirability of the land and
its development.
 The nature and desirability of areas around the country
are impacted by features such as rivers, lakes, streams,
oceans, mountains, valleys, forests, meadows, prairies,
and deserts.
o Size and Shape
 The size of the land must be accepted as is, unless an
adjacent parcel could be acquired.
 If adjacent parcels can be obtained, the process of
assemblage may occur.

o Transportation
 The availability and ease of transportation is an important
factor that affects real estate value.
 It is typically classified as an environmental force, but it is a
good example of a factor that interweaves all four categories:
physical, economic, social, and governmental.
• Economic Influences
o Introduction
 Some economic forces that influence value are the availability
of money and credit, interest rates, industrial and commercial
trends, employment trends, wage levels, price levels, regional
and community economic base, new development, and rental
and price patterns.

o Availability of Financing
 The kind of financing available impacts property values.
 Purchasing power is one of the elements essential to actual
demand. Without the ability to purchase, houses are not
sold.
 Interest Rate
• The interest rate determines the quality of the financing and
the purchasing power of the buyers in the marketplace.
 Inflation in the economy or just in the regional or local real
estate market can cause an apparent increase in value.
• Unearned increment is the term used in real estate appraisal to
indicate an increase in value that was not the result of anything
the owner did.

 Employment and Wage Levels
• Jobs may be offered from private enterprise, government
sources, or military installations.
• Another important factor to keep in mind is whether
employment in the area is dependent upon a single industry or
even a single company.
 Business Climate
• The presence of shopping areas, offices and medical suites as
well as financial, wholesale, industrial, and other consumer-
friendly businesses is important to establishing value.
• A blighted area is a section of the inner city, where the majority
of buildings are run down.
o It creates a cycle in which the decrepit atmosphere repels
business and industry.

 Natural Resources
• Natural resources have an effect on property value.
• They can be the primary source of wealth for the area, with industry
and employment centering on them.
• Political or Government Regulations
o Introduction
 On the national level, tax policy, government loan-guarantee
programs, and environmental regulations are among the most
influential political forces that can influence real estate value.
 At the state and local level, zoning and health regulations, building
codes, health codes, rent controls, redevelopment districts, first-time
homebuyer assistance programs, and public services such as police
and fire protection are among the things significantly impacting real
estate values.

o Taxes
 Federal, state, and local taxes can impact real estate
values.
 High income taxes result in less money available for real
estate purchases.
o Federal Financing
 FHA and VA loans are federal programs permitting a very
low down payment or no down payment.
 This facilitates purchasing power and increases the
number of potential buyers for housing.

o Environmental Restrictions
 Government organizations like the Environmental Protection
Agency (EPA) as well as private groups like the Sierra Club
and Greenpeace have combined to create a strong voice of
concern about the environment.
 In areas where a housing shortage exists, the balance of
supply and demand makes supply even shorter.
o Building Restrictions and Zoning
 The Planning Commission and the City Council can slow
growth and determine the direction of growth by imposing
certain zoning regulations.
 Building codes pertain to the structures that will be placed on
land; their main purpose is to provide minimum standards to
protect the environment, and the lives of occupants and the
public.

o Public Services
 Public services like police and fire protection, schools,
hospitals, and city parks, pools and other recreational
facilities can add appeal and value to a community.
• Social Ideals and Standards
o Population Trends
 Birthrates, mortality rates, and migration to and from an area
are all social influences on value.
o Family Characteristics
 Not only does family size have an impact on the necessary
house size, but also what is important to the people who
comprise a particular marketplace can have an effect on
property values.

• Social Ideals and Standards
o Other Social Factors
 Trends are constantly changing, and a “dated” look will
affect a home’s value.
 A stigma is a lingering effect in the minds of people
regarding the desirability or usefulness of a property.
 The property is regarded as tainted in some way; and if the
property is regarded as tainted in a given marketplace, it is
tainted in that marketplace.
 A home in which a notorious murder occurred most likely
will carry a stigma with it, at least for a generation and
possibly longer, depending on the population turnover in
that neighborhood.

 Types of Value
• Introduction
o In real estate appraisal, value is the monetary worth of a
property in a given marketplace at a given time.
o It is not what an owner would like to think he or she can obtain.
o It is what owners actually can obtain based on objectively
reading the marketplace.
• Market Value
o Real estate taxes, litigation, and legislation also reflect a
concern for market value.
o Categories of Conditions in Market Value Definition
 Relationship, knowledge, and motivation of the seller and buyer
 Terms of sale
 Conditions of sale
o An arm’s-length transaction refers to a transaction in which all
parties involved are knowledgeable, acting in their own self-
interest and are under no undue influence or pressure from
other parties.

 Types of Value (continued)
• Investment Value
o Investment value is the value of an income-producing
property to a specific investor based on his or her
investment requirements.
• Value-in-use (use value) is the value a specific property
has for a specific use.
o Value-in-use represents the value of an income-producing
property to its current owner.
• Assessed value applies in ad valorem taxation and is the
value of a property as it appears in the tax assessor’s
office.
o Assessed value may not conform to market value, but it is
usually calculated in relation to a market value base.

• Insurable value is the value of an asset as
determined by the estimated cost of replacing it.
o Insurable value (replacement value) is important to
insurance companies and property owners alike.
• Going concern value is the value of an entire
business operation.
o It applies only to a business that is currently operating.
o It is based on capitalizing the net income produced by
that business.
• Salvage value is the estimated value that an asset
will realize upon its sale at the end of its useful life.
o Scrap value is the estimated value for a property that is
sold primarily for its components.

• Liquidation value is the value of a property that has
to be sold immediately by a seller who is under
extreme compulsion to sell.
o It precludes the element of a reasonable time of
exposure in the marketplace that is included in the
definition of market value.
• Other Types of Value
o Loan value, book value, condemnation value, easement
value, extrinsic value, contract value, corner value,
front-foot value, square-foot value, advertising value,
cash value, interim value, nuisance value

 Principles of Valuation
• Principle of Supply and Demand
o The law of supply and demand is almost universally
recognized as being the first step in how market prices
are determined.
 Supply refers to the total amount of a given type of
property for sale or lease, at various prices, at any given
point in time.
 Demand refers to the desire and ability to acquire goods
and services through purchase or lease.
 Increasing supply or decreasing demand will reduce the
price in the market.
 Reducing supply or increasing demand will raise the price
in the market.

 Principles of Valuation (continued)
• Principle of Substitution
o The principle of substitution is the foundation for all of
the appraisal process.
o Substitution states that the market value of a property
is affected by the cost of obtaining an equally
desirable and valuable property as a substitute.
• Principle of Competition
o Competition tends to bring supply and demand back
into balance.
o Competition is fundamental to the dynamics of supply
and demand in a free enterprise, open market
economy.

• Principle of Change
o The principle of change states that the continuing effects of
economic, social, and governmental forces on the property and
its environment result in continuous changes in market value.
o Rapid changes may be caused by natural disasters, plant
closings, new construction, or governmental action.
o All improved real property experiences a four-stage
neighborhood life cycle.
 The four stages, although not always distinct, can best be described
as development, stability, decline, and revitalization.
• Development (Growth). Development is initially the stage when the
subdivision is being built.
• Stability. Stability is usually an extended period of time when the
amenities are enjoyed and used by families.
• Decline. Old age and decline eventually come. The properties are not
as desirable as they once were.
• Revitalization. Growth and decline is normal in all areas, and often it
can be reversed just as it reaches the last stages.

• Principle of Anticipation
o The principle of anticipation anticipates the future
benefits that are to be derived from the property.
o The principle of anticipation applies not only to
positive future benefits but to anticipated negative
future influences as well.
• Principle of Balance
o The principle of balance states that equilibrium is
reached when complementary uses of neighboring
property permit maximum value for individual
properties and the neighborhood.

• Principle of Balance
o Agents of Production
 Labor includes wages and all payrolls except
management.
 Management includes all charges for coordinating the
enterprise.
 Capital covers the costs of constructing the necessary
buildings and providing equipment.
 Whatever return is left after full satisfaction and payment
of the other three agents in production is imputable to the
land.

• Principle of Contribution
o The principle of contribution is the concept that the
worth of a particular component is calculated in terms
of its contribution to the value of the whole property,
or its worth is calculated as the amount that its
absence would detract from the value of the whole.
o The theory of increasing and decreasing returns states
that successive increments of one or more agents of
production added to fixed amounts of other agents
will enhance income, in dollars, benefits, or amenities,
at an increasing rate until a maximum return is
reached.

• Principle of Conformity
o The principle of conformity states that the more the
form, manner, and character of structures are in
harmony with one another, the more valuable each of
those structures is.
 The theory of progression states that the value of an
inferior property is enhanced by its association with better
properties of the same type.
 The opposite of progression, regression states that the
value of a superior property is adversely affected by its
association with an inferior property of the same type.

• Principle of Opportunity Cost
o The principle of opportunity cost recognizes another
type of competition—one that occurs between
industries.
o Opportunity cost is the profit lost on an investment
you were unable to make because the money was
already invested in something else.

Re appr unit 4

Recommended

Recommended

More Related Content

Similar to Re appr unit 4

Similar to Re appr unit 4 (20)

More from Eric Sharkey

More from Eric Sharkey (20)

Recently uploaded

Recently uploaded (20)

Re appr unit 4