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Discuss About Property Valuation And Also Explain Its Key Principles

Referencing Styles : MLA | Pages : 1

It is very important to sellers, purchasers, real estate investors and lender to value a property correctly. In order to make good financial decisions, by the lenders, buyers and sellers it is very important to calculate the price of the real estate. The process by which the economic value of real estate is determined. Valuation of property aims to calculate the fair market value. It should be the price at which a knowledgeable seller is willing to sell his or her property and a knowledgeable buyer is willing to purchase it. It is assumed that both the parties have the required information and neither of them are forced to buy or sell. Fair market value is not always equal to the sales price. For example, a short sale of real estate may not bring fair market value as the seller is distressed and must sell the property right away. Probable buyers know this so they have a bargaining advantage and ultimately gets the property for less than market value.

Valuation of property stands upon four foundation pillars. First is the demand. Demand is the magnitude of interest and the purchasing power in the market for buying the property. Second is the utility. Utility is the ability of the real estate to satisfy the use or need of prospective purchasers. Third is the scarcity. Scarcity is the limitation of supply of real estate. Fourth is the transferability. It refers to the ease at which a real estate can be legally transferred to a new owner.

The principles of property value:

  • The principle of conformity- it states that real estate whose use and style conforms with property in the immediate area usually has a higher value than property that doesn’t.
  • The principle of change – it recognizes that various forces act upon and change the real estate market and property values. For example, pollution that spills into a residential neighborhood is an environmental change that would lower property values.
  • The principle of substitution – it is the ability of one piece of real estate to be an exact acceptable substitution of another. For example, if a three bed room home in the neighborhood is been sold at $ 200000, then one will not give more than $ 200000 for another three- bedroom home in the same area. The reason is buyers can substitute one home for another one in that same price.
  • The principle of supply and demand – it states that if supply of real estate exceeds demand, prices will go down. But if the demand for real estate exceeds supply, then the prices will go up. For example, the properties which are sea facing are limited, hence its supply is limited and the demand for the property is high. This increases the value of the property. Now places where there is oversupply of apartments, there the demand is less , hence the price for that property will be less. The last home to be sold in a locality where the demand for home is high is more costly than the first home sold in that locality.
  • The principle of highest and best use – it states that property will get the best price when it is being used in a way that gives the highest economic value. For example, a single – family home in an industrial area is not the highest and best use of the real estate as the owner can get better return by using the property for commercial use. Though, majority people does not want to buy home in an industrial zone. A parking lot in a busy downtown should be replaced by an office building.
  • The principle of progression – it rules that one higher value real estate can pull up the value of lesser value property in that same zone. The home which is not in good condition, would still fetch more money as it is around the best houses in the locality.
  • The principle of regression – it is the opposite of the principle of progression. If a high – valued property is surrounded by lower – valued property, then the price of high value property tends to be down.
  • The principle of contribution – it involves determining how each element of the real estate contributes to the overall value of the property. For example, a residential lot has a home along with a pool. The pool, the land and the home are three  different components which add to the overall value of the real estate. The cost of installing an air – conditioning system and remodeling an older office building increases the cost of the property.
  • The principle of anticipation – buyers purchases properties for future benefits. The principle says that the value of the property rises using anticipated benefits to be gained from a property in the future. For example, if the cost of a home along with a pool is $ 190000. A similar home without a pool sells for $140000. Then the payment for $ 30000 is for the anticipated benefits of the pool. The value of a home may be affected if there are rumors that the plot on which the home is located may be converted to commercial use in future.
  • The principle of plottage – it holds that the merging or consolidation of adjacent lots held by separate land owners intone larger lot under a single land use tends to produce a higher total land value than the sum of the two sites valued separately. For example, if two adjacent lots are valued at $ 35000 each, their total value, if consolidated into one larger lot under a single use, may be $ 90000. The process of merging the two lots under one owner is known as assemblage. The increase in value is called a plottage increment and is a form of unearned increment.
  • The principle of increasing and decreasing return – Improvements or additions to land and property will ultimately reach a point where that will no longer have an effect on the value of the property. When money spend on improvements creates an increase in income of the property or increases the value of the property, then the law of increasing returns is applicable. But when additional improvements does not create a proportionate increase in income or value, then the law of diminishing returns applies.


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