Week 2 - Foundation of value Flashcards
4 factors that create value
Utility – the benefits a prospective purchaser believes can be obtained by the purchase
Scarcity – supply must be relatively scarce
Effective purchasing power – ability to acquire goods with cash or its equivalent
Desirability – must satisfy human needs (shelter, safety) or wants (prestigious home with large pool)
what are the agents of production:
Land
Labour - Direct-Wage, Materials… Indirect-Permit, Marketing, Tax, Overhead…
Capital-Physical capital (equipment), which can produce other goods
Entrepreneurial co-ordination -Developer’s sweat equity (time & expertise)
what is value?
the anticipated benefits to be derived from ownership or future usage or income flow.
Residential – pleasures of ownership and occupancy
Investment property – anticipated rental income & capital gains
forces affecting property value include:
Social, Economic, Governmental, and Environmental forces
factors affecting DEMAND of properties
Demographics >Consumer preferences Economic aspects >Finance market performance (interest rates, credit standards) The economy Legal and political aspects Expectation of capital gains Expectation of future housing prices
factors affecting SUPPLY of properties:
Costs of inputs such as land, labour, construction materials
Government regulatory factors
Availability of funds
Developer profit expectations
explain competition
Buyers and sellers of property operate in a competitive market setting
Competitive market forces tend to reduce unusually high profits.
In the long run, supply will respond to rising house prices, and house prices will return towards their equilibrium level.
In the case of too much competition, it can become detrimental.
explain substitution
valuation concept that states when several similar goods or commodities are available the one with the lowest price will attract the greatest and widest distribution.
Values of properties are determined by – and may be estimated from – prices paid for substitute properties.
If two items are identical, except for the price, a willing buyer would always choose the item with lower price
explain balance
The greatest value in property will occur when the components of the property (e.g. bed rooms, bathrooms, garages) are proportional to each other
> it may be uneconomic to include a 4th bedroom if the costs exceeds the value added to the property
> diminishing returns = increments added to a parcel of property produce greater net income up to a certain point
at this point, the point of decreasing or diminishing returns maximum value is achieved
explain contribution
concept that states value of a component is measured in terms of it’s contribution to the value of the property as a whole
The principle of contribution requires a valuer to measure the value of any improvement to a property by the amount it contributes to market value, not by its cost.
MARKET VALUE NOT COST
explain surplus productivity
net income remaining after the costs of production have been paid
explain conformity
valuation principle that real property value is created and sustained when the characteristics of the property conform to the demand of the market
Properties that deviate greatly from the market norm are not accepted, and their values are reduced, as compared with more acceptable properties.
Zoning legislation may also contribute to conformity
explain increasing returns
larger amounts of agents of production produce greater net income up to a certain point (decreasing returns)
what is super adequacy
Over improvements in properties would destroy value
Examples: building with over specifications, detached garages, pebble driveways
define progression (positive externality)
Valuation concept that the value of an inferior property is enhanced by its association with better properties of the same type
Define Regression (negative externality)
Valuation concept that the value of a superior property is adversely affected by it’s association with inferior properties of the same type
- factors outside the property
explain change
Results from cause and affect relationships among the forces that influence real property value
No condition remains the same indefinitely, change is part of the economic cycle
Property values are constantly affected by the changes in market
Consumer preferences
Demographics
Characteristics of the neighbourhood
Ownership consists of various rights, which can be separated respectively
Sell
Lease
Mortgage
Occupy
explain surface rights
the right to use the profits of the underground portion of the designated property e.g extracting coal, minerals, oil gas
explain air rights
the right to undistributed use and control of designated for space above specific land area
explain types of ownership
Ownership in severalty
Individual ownership.
Joint tenancy
By two or more with the right of survivorship
Tenancy by the entirety
Similar to Joint Tenancy but applies only to spouse
Tenancy in common
Held by two or more with undivided interest. Can be sold off.
explain partnerships
Jointly owned by two or more partners General Partner (GP) Partner whose liability is not limited Limited Partner (LP) Passive partner whose liability is limited to its contribution
