Six Economic Principals of Real Estate Valuation

property valuations

Real estate valuation can be defined as a process that is used by property experts to estimate the single price an investor can pay to own a given property. Brokers and agents are familiar with a method known as comparative market analysis. In such a case, the property valuation involves estimating the real estate value based on sale prices of similar properties in the locality. In this post, you will learn important applied economic principals to offer you an idea of the effect they have.

Anticipation

anticipation property valuation methodAnticipation is simply the expectation of the future benefits. This means that real estate investors do measure value of an investment based upon anticipated future income stream that is generated by the property. Therefore, they are likely to the volume the property based on income it generates instead of the market value based on land costs and construction costs.

Conformity

This is the requirement for reasonable compatibility and similarity in a particular location. For instance, compatible land uses do generate high values as compared to limitations imposed on a property because of its location. An apartment situated in a residential area is likely to have a higher value as compared to one that is situated in an industrial area.

Supply and demand

This is a principle that involves both the demand and scarcity of the property. An investment with similar economic and physical characteristics can sell for similar prices. Land in metropolitan areas commands a high value as compared to land in rural areas.

Highest and best use

highest and best use of a propertyThis is a great concept which encompasses the best use and highest use of a property as compared to its current use. This means that it should be legally possible, physically possible, and financial, and economically feasible. For instance, if an apartment at Northern Beaches can be converted into a condo, this can greatly increase its price.

Contribution

This means a value of income property can easily be impacted when it is economically, legally, and physically feasible to contribute more space. This means that the value added can offset the costs. A good example is when an office building is enlarged to add extra rental office space.

Substitution

Substitution is an opportunity cost principle. This means that a logical real estate investor cannot pay more for an investment property.

The above are the six principles or concepts of real estate valuations. Nowadays, you can hire expert property valuators to do the work for you.

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Author: Paul Macdonald

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