Economic Principles of Property Valuation
Evaluating the potential value of a property is key to selecting a real estate investment that will deliver profitable returns. There are some basic economic principles at play when determining a property’s value. They are useful tools in s property’s evaluation process.
Seven Economic Concepts
The basis of value of any piece of real estate is grounded in these seven economic concepts.
1. Demand: There must be a need or want for the property along with the financial resources to engage in the desire.
2. Utility: The property must be able to serve its intended purpose. It must have the degree of access required for a business or perhaps be fairly remote if it is to serve as a vacation rental.
3. Scarcity: Comparable properties must be limited.
4. Transferability: It must be easy for one owner to sell and transfer property rights to another. Sometimes, especially in real estate investments overseas, there may be government requirements which restrict the property’s transferability.
5. Regression: An awareness of the property’s surroundings is beneficial. If the property is surrounded by run down properties, this will bring down the value of your investment.
6. Progression: On the other hand, a property’s value can be positively affected if it is surrounded by superior properties. One strategy to consider is to purchase a poorly maintained property in a neighborhood in better condition. With some upgrades and repairs, the property will increase in value as its appearance and function begins to resemble those around it.
7. Conformity: Adjust property to the standard of its surroundings. However, beware of investing too much into a property. An overimproved property will be negatively impacted if it outshines it’s neighbors.
