Principles of value

Why property has value

Value depends on utility, scarcity, desire, and effective purchasing power. Utility is usefulness; scarcity is limited availability relative to demand. Desire without the ability to pay is not effective demand. Cost is what is spent, price is what a transaction brings, and market value is an opinion of what a property should bring under market-value conditions. These principles explain market behavior; they are not promises of a particular selling price.

Alternatives and future benefits

Substitution means a buyer generally will not pay more for a property than the cost of an equally desirable substitute available without undue delay. Anticipation means present value reflects expected future benefits, such as rent, enjoyment, or resale proceeds. Supply and demand affect prices: with other factors unchanged, more demand against a fixed supply tends to raise prices. Competition draws entrants toward excess profits, which can reduce those profits. Change reminds us that economic, social, governmental, and physical conditions continually affect value.

Improvements and their surroundings

Contribution measures an improvement by the value it adds to the whole property, not its cost. Increasing and diminishing returns describe how successive expenditures can first produce larger benefits and later produce smaller marginal benefits. Balance seeks the productive combination of land, labor, capital, and management. An oversized building on a cramped site may lack balance.

Conformity concerns compatibility with neighborhood uses and market expectations, not identical design. Progression is an upward influence on a lesser property from superior surrounding properties; regression is a downward influence on a superior property from inferior surroundings. Externalities are influences outside a property's boundaries, such as nearby amenities or nuisances.

Choosing a use

Highest and best use is the reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive. Test legal and physical constraints before comparing feasible uses. The use with the largest gross revenue need not produce the greatest value after costs. Analyze land as though vacant and property as improved; an existing building may be worth retaining until redevelopment produces a better result.

For example, a proposed shop may fit a parcel physically but fail its zoning restrictions. Among permitted uses, an expensive project may fail financial feasibility. Compare the value produced by the remaining feasible choices. For an existing home, a $40,000 kitchen project adding $25,000 to market value contributes $25,000; its cost exceeds its contribution by $15,000. Ask what buyers gain and what alternatives they have.