Valuation Principles
These real estate valuation principles are our set of fundamental guidelines designed to help professionals, investors, and appraisers assess the worth of properties accurately. These principles provide a structured framework for understanding the complex factors that influence property values. By comprehending and applying these principles, individuals involved in the real estate industry can make well-informed decisions and predictions regarding property values.
Progression: This asserts that the value of a property can rise due to its location among similar but more upscale properties. In a high-end neighborhood, a modest property gains value as the presence of luxurious residences enhances the perceived desirability of the area, leading to increased demand and, consequently, higher property worth.
Regression: This highlights that a property’s value can be influenced negatively if it stands out too much in a neighborhood with lower-quality homes. The principle underscores the importance of conformity to local standards for optimal property appreciation. A property’s value may not rise as expected if it doesn’t align with the overall quality and features of its surroundings.
Conformity: Conformity in real estate valuation emphasizes that a property’s appreciation is closely tied to its alignment with the characteristics of neighboring properties. Deviating significantly from the norm in terms of size, layout, or style may limit the potential increase in value, underlining the importance of considering local expectations and standards in property improvements.
Substitution: When it comes to valuing a property, it’s like picking between options on a menu. If you have two houses that are very similar and one is priced much lower, most people would go for the cheaper one. This is what we call the substitution principle. It means that the value of a house is influenced by what other similar houses in the neighborhood are going for. So, if a seller asks too much, buyers might just choose a more affordable option, and this can affect the value of the higher-priced house.
Change: The value of a property in Nigeria can change based on different things happening around it. For instance, if the area is becoming more popular and businesses are growing, the property value might go up. On the other hand, if there’s a problem like a flood or if businesses are closing down, property values might go down. Understanding these influences is crucial for accurate and informed real estate valuation.
Anticipation: Anticipation plays a crucial role in property value. Investors continuously estimate a property’s future worth based on expectations of future events. If an area is anticipated to experience significant growth and development, this anticipation can drive up demand for properties in that area, even before any actual changes occur. As a result, property values increase due to the expectations of future development.
Contribution: The principle of contribution suggests that the value added to a property through improvements may not always correspond to their cost. The effect on property value depends on market demand. In a slow real estate market, significant renovations might not significantly increase a property’s value. However, in a hot market, even minor improvements can lead to a substantial boost in the property’s worth.
Plottage: The concept of plottage is observed when adjacent, separately owned lots are combined into single ownership and used for a unified purpose, often with a common zoning. This practice tends to maximize land value. For instance, imagine a developer who acquires multiple small lots in a neighborhood, combines them into one larger plot, and develops a single, cohesive property. This act of consolidation can lead to a notable increase in the land’s value, as the unified property may be more attractive and functional.
Highest and Best Use: Real estate valuation is optimized when land is utilized in the most suitable and profitable manner. For instance, consider fertile farmland that is best used for crop cultivation, or land near a busy interstate freeway, which is ideal for highway commercial zoning. The value of land is determined not only by its size but also by its intended use. When land is put to its “highest and best use,” it can achieve its maximum potential value.
Competition: Think of this as a race where sellers want to be the first to sell their houses. If suddenly, many houses just like yours are being sold, it’s like having more competitors in the race. Buyers might choose the cheaper ones, and this can affect how much your house is worth. Understanding this principle is crucial for real estate professionals and investors to gauge how market dynamics influence property prices.