5 Economic Principles of Real Estate Valuation

Real estate valuation is defined by economic, legal, and financial factors which make real estate distinct from other commodities. Commercial real estate valuation and residential appraisal services are required to calculate how these factors affect the price of real estate and how it drives the real estate market.

Here are 5 economic principles of real estate valuation:

Demand and Supply

Real estate valuation is significantly affected by the demand and supply of real estate properties. For example, the demand for sea-facing properties is very high versus its supply; hence these properties are in greater demand, leading to an increase in their prices. Vice Versa,  if there is an oversupply of residential properties, the demand will reduce, and consequently, the real estate value and rents will go down.

Substitution

The value of any property is established in comparison to other desirable similar properties. In theory, buyers will not desire to pay more for any property than what it would cost to obtain similar real estate properties with equal appeal and utility.

Principle of balance

This principle refers the relationship that is between the principal cost added expenditure incurred on the property and the value it returns. The principle states that for every dollar invested in the value of the property, its value should increase by more that one dollar. 

Principle of progression

This principle states the real estate valuation of your prompt will depend on the perceived value of a location, and it will slate with the increase in the perceived value of your site. For example, if you are living in a house that is old and craggy, but your neighborhood has homes with the newly renovated apartments, then the price of your property will also increase because of the increase in the value of other homes in your location.

Principle of regression

This principle is exactly the opposite of progression principle. The idea behind regression principles that the real estate valuation of your property will be reduced if the perceived value of the home in your location is reduced. For example, even if you have renovated your home, and it is the best house on the block in a neighborhood of hurricane-hit homes, the value of our home will decrease.

On the face of it, real estate valuation might seem very simple. However, it is a complicated process that requires detailed planning and expertise. You will need professional residential appraisal services that will help you handle your real estate valuation expertly.

What are the Economic Principles of Real Estate Valuation?

Characteristics of a Real Estate Market

Real Estate is by character defined by economic, legal and financial circumstances. As the real estate market exists in a regional and national economy set-up, any changes in these economies will affect the real estate scenario in a location. Real estate is pricy because individuals, businesses and institutions want to buy property and this creates an economic value for real estate. While property rights are exchanged in their typical markets with features of their own, the exchange is influenced by marketing techniques and transactions. 

Real estate market is chancy

Real estate markets fluctuate, where prices go up and down depending on demand and supply and changes in national and regional economies. This makes the real estate market unstable and risky, which is heightened by the involved significant capital costs. For real estate transactions to be genuine, the need for legal recognition for ownership with the rights of occupation is vital. Real estate is also subject to market risks, financial risks and business risks. 

A Real estate valuation is important

A real estate valuation is important for you to calculate a prediction of price-taking clues from the market forces, factors of finance, accounting, economics, and law driving the real estate market.

The Economic Principles Affecting Valuation

Principle of Anticipation

The principle of anticipation is a method where the appraiser uses the income approach to determine the value of a property. The appraiser will estimate the present worth of future benefits for the property. The value can also depend upon the anticipated utility for the property, or what the property can be used for.

Principle of Demand and Supply

The value of a residential or commercial real estate goes up depending on its demand and supply position.  For example, if there ain’t many properties facing beautiful scenic views, the demand for such a property will be more and the value of that property increases to meet that demand. Demand is also affected by craving. If there are too many apartments in a given area, the demand will reduce.

Principle of conformity

This principle is about how land is utilized in a particular area. For example, land must be used to reasonably conform to the area's existing standards. An orchard in the middle of a residential area where several condominiums have been built doesn't really conform with the current use of the land.

Principle of Substitution

Usually in a commercial real estate valuation or a residential one, a property’s value is determined by the cost of an equally desirable substitute property. This means one shouldn’t pay more for a property than what it would take to purchase a site and to construct a building of equal appeal and utility. 

For any residential real estate appraisals enlist the support of an experienced real estate agent like RD Clifford Associates