Basic Appraisal Principles-Chapter 14

Highest and best use of a land or a site as though vacant is defined as

"Among all reasonable, alternative uses, the use that yields the highest present land value, after payments are made for labor, capital, and coordination. The use of a property based on the assumption that the parcel of land is vacant or can be made vacant by demolishing any improvements." Even if a property is improved, we can close our eyes and pretend that it is vacant, then imagine what would be the best thing one could do with that piece of vacant land.

The principle of regression is defined as

"In appraisal, the concept that the value of a superior property is adversely affected by its association with an inferior property of the same type."

The principle of progression is defined as

"In appraisal, the concept that the value of an inferior property is enhanced by its association with better properties of the same type."

The principle of supply and demand is defined as

"In economic theory, the principle that states that the price of a commodity, good, or service varies directly, but not necessarily proportionately, with demand, and inversely, but not necessarily proportionately, with supply. In a real estate appraisal context, the principle of supply and demand states that the price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply."

The principle of conformity is defined as

"The appraisal principle that real property value is created and sustained when the characteristics of a property conform to the demands of its market." This principle is closely aligned with the principle of balance. It postulates the premise that properties fare better when they meet the expectations of the market.

The principle of increasing and decreasing returns is defined as

"The concept that successive increments of one or more agents of production added to fixed amounts of the other agents will enhance income, in dollars, benefits, or amenities, at an increasing rate until a maximum return is reached. Then, income will decrease until the increment to value becomes increasingly less than the value of the added agent or agents. Also called law of increasing returns or law of decreasing returns." An application of this principle in real estate might be in how densely you develop a property. This could apply to lots in a subdivision that get increasingly smaller until you reach an optimum size that will lead to the best return and highest utilization of the land.

The principle of contribution is defined as

"The concept that the value of a particular component is measured in terms of its contribution to the value of the whole property, or as the amount that its absence would detract from the value of the whole."

The principle of opportunity cost is defined as

"The cost of options forgone or opportunities not chosen."

Highest and best use is defined as

"The most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued."

The principle of surplus productivity is defined as

"The net income that remains after the costs of various agents of production have been paid."

The principle of balance is defined as:

"The principle that real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium This can apply to relationships among components of a property, such as the relationship between land and improvements. Once this proper balance is achieved, maximum value is attained.

The principle of change is defined as

"The result of the cause and effect relationship among the forces that influence real property value." Change is constant. Real property values are dynamic and subject to constant and immediate change.

Highest and best use as improved is defined as

"The use that should be made of a property as it exists. An existing improvement should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one." Maybe the existing use is not clearly the optimal use for the property, but it's not far off. It is viable and its present use will reap a reasonable return for the foreseeable future.

The principle of anticipation is defined as

"the perception that value is created by the expectation of benefits to be derived in the future." This principle has its strongest application in the valuation of income producing properties Another definition of value is "the present worth of future benefits."

If we are appraising a property that is currently improved, it is likely that we will need to develop two opinions of highest and best use:

1. Highest and best use as though vacant 2. Highest and best use of the property as it is currently improved

The agents of production are defined as

Land, labor, capital, and entrepreneurial coordination.."

The principle of substitution is defined as

The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based."

The principle of externalities is defined as

The principle that economies outside a property have a positive effect on its value while diseconomies outside a property have a negative effect on its value. This means that good things or bad things can happen to your property's value based on what is located around it.

Principles of Progression and Regression

These two principles are the result of what happens when the principle of balance is violated. We intuitively understand what happens when we have the most expensive or the least expensive house in the neighborhood.

True or False? When developing an opinion of site value of an improved property, an appraiser needs to consider the highest and best use of the property as though vacant. True False

True

When purchasing a home as an owner-occupant, the purchaser's anticipated benefits are

amenities

Which valuation principle has its strongest application in the valuation of income-producing properties?

anticipation

The concept of highest and best use applies to

both vacant land and improved property

The principle of contribution is used when :

determining how much to adjust for differences between various components of a property.

We must consider the highest and best use of the property as though vacant when :

developing an opinion of land or site value.

The principle of supply and demand states that price varies _______ with demand.

directly

- Supply and demand will tend to move towards

equilibrium

The return on capital

interest

The net income that is left over after the four agents of production are paid is returned to the

land

The return on entrepreneurship

profit

The return on land

rent

If there is anything at all left after satisfying the four agents of production, the excess profit would be returned to the land. This is the principle of

surplus productivity

the sales comparison approach relies most heavily on:

the principle of substitution. This concept is important for residential appraisal, because although all homes are different, they are also more or less replaceable

The highest and best use is

the use for which the property is best suited, will produce the best utility, and will bring the highest return.

The return on labor

wages

The principle of competition is defined as

when two species are competing for the same resources, one species will be better suited to the niche, and the other species will be pushed into another niche or become extinct.

basic economic principles that apply to all kinds of real property appraisal:

• Anticipation • Change • Supply and demand • Competition • Substitution • Contribution • Externalities • Balance • Conformity • Progression and regression • Opportunity cost • Four agents of production • Increasing and decreasing returns • Highest and best use

There are four criteria used in determining the highest and best use of a property. The highest and best use of a property must be:

• Legally permissible • Physically possible • Financially feasible (sometimes called "economically feasible") • Maximally productive