This is probably the most important factor in pricing residential property in
an active market. The maximum value of a piece of property is greatly
influenced by the cost of acquiring a substitute or similar piece of
property.
Highest and best use
The principle of highest and best use simply means that value is influenced by
the potential profit that the property could bring. This principle is very
useful in evaluating commercial properties.
Law of supply and demand
Simply put, property values rise when there are more buyers than sellers and
property values fall when there are more sellers than buyers.
Example: In a town where the primary employer is a factory that is scheduled to
close, property prices will likely fall because there will be many more people
selling there homes to move to where they can find new employment.
Conformity
The principle of conformity states that maximum value is realized when land
uses and architecture are reasonably uniform in the same area.
Progression and Regression
The prevailing type of home will influence the value of all the homes in that neighborhood. For example, a single grandious house in a neighborhood full of smaller modest homes will be valued lower than if in a neighborhood of similar homes. This is called Regression. Value is decreased by being associated with the less desirable homes.
By the same token, a single modest home in a neighborhood full of mansions will be valued higher than if in a neighborhood of similar homes. That is called progression. Value is increased by being associated with the more desirable homes
Contribution
The incremental amount of value contributed to the total value of a property by
any given component, as opposed to the actual cost of the component.
For example, adding a pool to a home brings an additional $10,000 of value to a property, however the cost of building the pool is $20,000.
Law of increasing and diminishing returns
When improvements increase the value of the property more than the cost of the
improvements, the law of increasing returns applies. When the increase of
value is less than the cost of the improvements, the law of diminishing returns
applies.
In the example above with the $20,000 pool, the law of diminishing returns
would apply since it only brings an additional $10,000 of value to the
property.
Competition
Competition is created in markets where substantial profits are being made. For
example in a hot real estate market, home builders will increase production in
homes to maximize profits while prices are high. This increase in production
will lead to an increase in supply which may force home prices to drop.
Change
Change is continuing effects of external forces on the property and its value. These forces can be economic, social, and governmental.
Anticipation
Value is created where there are anticipated future benefits from the property.
