The Value of Real Estate
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The definition of value used in an appraisal or Current Market Analysis (CMA) analysis and report is a set of assumptions about the market in which the subject property may transact. It affects the choice of comparable data for use in the analysis. It can also affect the method used to value the property.
What is the difference between appraised value and market value of real estate?
In short, the appraised value will end up being more important than the market value. ... While the appraisal is the closest estimate to the actual value of the home and can determine the financing process, the market value is the price that is usually the purchase price in the end.
To fully understand real estate valuation, there are several definitions and concepts that are important to know. The seven characteristics of real estate include four value characteristics that all items must have, as well as three physical characteristics that are unique to real estate. There are also broad market factors and property-specific factors that can affect real property value. That’s followed by the difference between value, price, and cost, before defining market value and the required elements of an arm’s length transaction. Finally, assemblage, plottage, subdividing, and frontage as they relate to increasing the value of land are important.
• Describe how several broad factors and specific principles impact the value of property.
• Contrast value, price, and cost.
• Define the necessary factors for an arm’s length transaction.
• Identify factors related to subdividing land that impact its value.
Arm’s Length Transaction Assemblage
External Obsolescence Frontage
Functional Obsolescence Highest and Best Use Immobility Indestructibility
Law of Decreasing Returns Law of Increasing Returns Market Value
Mortgage Lending Principles & Practices
Characteristics of Real Estate
Mortgage professionals possess a broad base of knowledge. Since mortgage loans depend on the value of the real estate as the underlying collateral for the loan, a basic understanding of value and how it applies to real estate is useful. ere are seven characteristics of real estate: Four value characteristics and three physical characteristics. All of these are important to real estate value. As we review the seven characteristics of real estate, note that the four value characteristics apply to all products and services, not just land. These must be present in any item for it to have value. On the other hand, the three physical characteristics are unique to real estate. These physical characteristics are what make land inherently valuable.
Value is the amount of goods or services offered in the marketplace in exchange for something else. For anything to have value, certain value characteristics must be present and perceived by the user and other potential users of the property. All four of these characteristics must be present and in harmony for the item to achieve maximum value. e four value characteristics are demand, utility, scarcity, and transferability (remember D U S T).
Demand is the need or desire for a speci c good or service, and is an essential ingredient in creating value. Without demand, any amount of supply is meaningless. Sometimes though, demand can be created simply by lowering the price. On the other hand, prices can be raised too high even when there appears to be strong demand. High prices cause some people to look for alternatives in the marketplace. is is known as the theory of substitution, which is discussed later. One final element of demand to consider is a person’s ability to pay for an item. Effective demand, or purchase ability, means a prospective buyer has enough disposable income available to satisfy her needs or desires. A person may want a million-dollar home, but if she can’t afford to buy it, then that person’s demand doesn’t count.
Utility is the ability of a good or service to satisfy human wants, needs, or desires. Utility is the degree of usefulness to prospective users. For example, there can be demand for housing, but your house must be perceived as useful (e.g., enough bedrooms) to someone interested in buying a house for it to have value to that potential buyer.
Furthermore, if there’s no perceived use for something, then there’s no perceived value. is is why public and private restrictions on land can impact value. For example, government restrictions on the size and placement of buildings may mean that a certain type of building can’t be built on a lot. Any such restrictions can impact the utility, and hence the value, of land.
Scarcity is the perceived supply of a good or service relative to the demand for the item. If there’s an unlimited supply of something, then it’s perceived to have little value. Of course, the scarce item must also be useful (have utility). Scarcity and utility must both be present. Things that are scarce but not useful have little value (e.g., common fossils), just as things may have little value if they happen to be plentiful, even if useful (e.g., air or an abundant source of water).
People generally perceive land to be valuable because there’s a limited supply of it. is notion of scarcity feeds the anticipation of real estate buyers who feel they’re buying property as an investment that will increase in value. Value is also derived from scarcity due to uniqueness; for example, the fact that there’s only one of a particular house in a given location. If people really desire a certain home in a certain location, then more value may be created.
Transferability is the ability to freely buy, sell, encumber, or dispose of property in any way that the owner sees it. Property value is derived from the freedom to transfer title readily from one person to another. The fewer restrictions there are on property, the more perceived value it has in the marketplace. If there are conditions on title to land, which restrict its future transfer, a buyer would likely not pay as much for the land (given that ready substitutes exist in the marketplace). Again, public and private restrictions are a factor. If there are any restrictions imposed on transferability, they may decrease the perceived value to potential buyers.
Finally, there’s the added requirement that the person receiving the property must have the ability to pay for it. We referred to this earlier as effective demand or purchase ability. Without this, desires and demands go unfulfilled because property won’t be transferred to the person who desires it.
Real estate has three physical characteristics that give land some inherent value. These unique characteristics are not present as a group in other types of property. Only real estate has this combination of physical attributes and, as a result, they have the ability to affect value. As we discuss the three physical characteristics of real estate, note how they often intertwine with the four value characteristics.
Uniqueness is a physical characteristic of real estate referring to the fact that each piece of land, each building, and each house is said to be a di erent piece of real estate. No two are exactly the same (also called non- homogeneity). Even if two houses or two buildings look the same, they are said to be different because of their location. Since more land cannot be created in a given location, this uniqueness leads potential buyers to view land as a scarce commodity. When people want to build in a certain area, they must compete with others for the limited supply of land in that area. Value is derived from this perceived scarcity due to uniqueness.
Immobility is a physical characteristic of real estate referring to the fact that it can’t be moved from one place to another. is is an equal bene t or detriment to all parcels of real estate in the same general area. is immobility of land helps its value in a good market, since other land can’t be moved in to take away potential customers (as can be done with other products), but it can also hurt land value in a bad market. Note that customers are somewhat immobile as well. It’s impossible to move a house and land from Boston to Chicago where there’s a buyer, and usually a person in Denver won’t buy a house in Atlanta if that person’s job can’t move too.
Indestructibility is a physical characteristic of real estate referring to the concept that it can’t be destroyed. us, real estate is said to always have some minimum value by virtue of its existence. Land is not consumed, nor does it wear out like other goods. But the actual and perceived utility of land can be a ected by the marketplace or other forces. Land always has the potential to be useful, but its usefulness, and hence its value, can change over time. However, the land itself can move or change shape by natural forces, for example:
• Erosion, which is the wearing away of soil due to the action of wind, water, or other forces
• Accretion, which is the addition to land, such as through deposits by water of sand or silt
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Building in Naples, Marco Island, and Golden Gate Estates, Nova Homes builds custom homes for the discerning buyer, priced from the $200s to over $2 Million.