English
Concepts and Types of Value, and Factors Influencing Them.
Concept of Value: Value is the monetary❓ worth of a property, good, or service at a specific time. It is dynamic and changes with conditions.
Basic Characteristics of Value (USTD): Value depends on:
- Utility: The property’s ability to satisfy a need or desire.
- Scarcity: Limited supply with high demand increases value.
- Transferability: Ease and legality of transferring property ownership.
- Effective Demand: Desire for the property supported by the ability to pay.
Value vs. Price vs. Cost:
- Price: The actual amount paid for a property in a transaction❓ (historical fact).
- Cost: Expenses required to create or develop the property (production-focused).
- Value: An estimation of the property’s worth in the market based on analysis (future-oriented).
Replacement Cost vs. Reproduction Cost:
- Replacement Cost: Cost to create a substitute property with the same utility, using modern materials and techniques.
- Reproduction Cost: Cost to create an exact replica of the property, using the same original materials and techniques.
Economic Theory of Value: The market is where buyers and sellers meet. Value is determined by supply and demand. Increased demand with constant supply leads to higher prices (increased value). Increased supply with constant demand leads to lower prices (decreased value). In a competitive market, prices tend to stabilize at the equilibrium between supply and demand. The principle of substitution states a property’s value cannot exceed the price of a substitute with equal utility. Opportunity cost affects value as investing in a property is not worthwhile if the return is less than an alternative investment.
Production as a Measure of Value: Wealth creation involves four factors:
- Capital: Money and equipment used in production.
- Land: Natural resources, including location.
- Labor: Human effort in production.
- Coordination/Organization: Management and planning to organize other production factors.
Optimal value is achieved when production factors are balanced. The law of diminishing returns occurs when increasing one production factor while others remain constant leads to a declining rate of return.
Impact of Use on Property Value: A property should be valued based on its highest and best use, which is reasonable, legal, and yields the highest profit. It must be legally permissible, physically possible, financially feasible, and maximally productive. The land and improvements (building❓s) should be valued based on the same consistent use. Conformity increases property value when surrounding property uses match the property being valued.
Types of Value:
- Market Value: Estimated price a property can be sold for in an open market under competitive conditions between a willing seller and buyer, both informed and acting wisely without coercion, after a reasonable marketing period, and with cash or equivalent payment terms.
*Conditions: willing seller and buyer, informed parties, acting wisely without coercion, reasonable marketing period, cash or equivalent payment. - Value in Use: Value of the property for a specific use only, not necessarily its highest and best use.
- Investment Value: Value of the property to a specific investor, based on their investment goals and financial circumstances.
- Liquidation Value: Value obtained from selling the property quickly with a limited marketing period, such as in a foreclosure sale.
- Assessed Value: Value determined by tax authorities for property tax purposes. It is often a percentage of the market value. (Assessed Value = Market Value x Assessment Ratio)
- Insurable Value: Value of the property for compensation under an insurance policy in case of damage.
- Going Concern Value: Value of a continuing business that includes real estate as an essential part of its operations.
Factors Affecting Value:
- Social Influences: Demographics, social trends, and norms. Example: Increasing young families may increase demand for small to medium-sized housing.
- Economic Influences: Interest rates, inflation rates, economic growth, employment levels, and credit availability. Example: Lower interest rates increase the demand and price.
- Governmental Influences: Zoning laws, property taxes, environmental regulations, building codes, and monetary/fiscal policies. Example: Zoning law changes to allow taller buildings can increase land value.
- Environmental Influences: Land characteristics, climate, infrastructure, and location. Example: A regular shaped land is more valuable than a irregular shape.
Chapter Summary
Introduction:
The chapter explores the concept of value in real estate appraisal, identifying its types and influencing factors.
Concept of Value:
- Value is the monetary❓ worth of property, goods, or services.
- Value depends on utility, scarcity, transferability, and effective demand (desire + purchasing power).
- Value differs from price (an actual transaction❓) and cost (expenses to build/create). Replacement cost is the cost to create a substitute with equal utility; reproduction cost is the cost to create an exact replica.
Economic Theory of Value:
- The market involves interactions between buyers and sellers.
- Relative supply and demand determine property value in a competitive market. Values rise when demand exceeds supply, and fall when supply exceeds demand. Property value cannot exceed the price of a substitute property of similar utility.
- When supply and demand are unbalanced, competition increases and tends to restore balance.
- Supply and demand forces are constantly changing. Appraisers must estimate value as of a specific date. Value depends on the anticipation of future benefits from property ownership. Change is evident in the real estate cycle, with value fluctuating as the cycle progresses from development to maturity to decline to revitalization.
Production as a Measure of Value:
- Wealth is created by the four agents of production: capital, land, labor, and coordination.
- Optimal value is achieved when agents of production are in equilibrium. The equilibrium point is the point of diminishing returns.
- Surplus productivity is attributed to land. It is the remainder of net property income after deducting the costs of capital, labor, and coordination.
- The value of a component of property is its marginal productivity, which is the amount its presence❓ increases the property’s value.
- Incremental increases in investment in a production agent will initially increase the rate of return, but will eventually reach a point of diminishing returns.
Impact of Use on Property Value:
- Property should be valued for its highest and best use, which is any reasonable and legal use that generates the greatest profit.
- Highest and best use depends on the nature and value of property improvements. The highest and best use of a vacant property is not necessarily the highest and best use of the property as currently improved.
- Land and improvements should be valued for the same (consistent) use.
- Property value is enhanced when the uses of surrounding properties are compatible.
Types of Value:
- Appraisal reports should specify the standard of value being assessed.
- Market value is determined by the market in a transaction between independent parties with reasonable knowledge and acting without coercion. The property should be exposed to the market for a reasonable time. Market value may vary depending on its definition, and should be adjusted to account for financing terms not equivalent to cash and other non-typical market concessions.
- Use value is the value of property for a specific purpose, rather than its highest and best use.
- Investment value is the value to a particular investor, not to the market.
- Liquidation value is what the property would bring with limited market exposure, such as in a foreclosure sale.
- Assessed value is the market value multiplied by the applicable assessment ratio.
- Insurable value is the value for reimbursement purposes under an insurance policy.
- Going-concern value is the value of a continuing business that includes real estate as an integral part of its operations.
Factors Influencing Value:
- Value is affected by social, economic, governmental, and environmental influences.
- Social influences include demographics and social norms.
- Economic influences affect property values by impacting the cost of capital and the purchasing power of buyers and investors.
- Governmental influences include laws and regulations such as zoning, taxes, environmental laws, financial regulations, and building codes.
- Environmental influences include land characteristics, climate, infrastructure, and location.
