Fundamental Principles of Assessment: Optimization, Consistency, and Productivity.

This chapter from “Real Estate Valuation Principles: From Land to Market Value” presents three fundamental principles for property valuation: highest and best use❓, consistency, and productivity.

Highest and Best Use: The most probable use of a property that results in the highest value. It is analyzed as vacant land and as improved property. For vacant land, it identifies the use that yields the highest return. For improved property, it determines whether existing improvements should be demolished, renovated, or retained. Highest and best use helps in identifying comparable properties. Example: If land with a house is worth $120,000, and the land as vacant for multi-family use is worth $80,000, the current use (house) is the highest and best use. If land with a dilapidated house is worth $70,000, and the vacant land for multi-family use is worth $80,000, the multi-family use may be the highest and best use, considering demolition costs.

Consistency: Land and improvements must be valued for the same use, even if valued separately, whether for current use or the new highest and best use.

Conformity, Progression, and Regression: Conformity states property values increase when surrounding property uses align with the subject property’s use and is the basis for zoning. Progression and regression describe the impact of a property’s incompatibility with surrounding properties’ improvement levels. Regression occurs when a luxury property’s value decreases due to less luxurious❓ surrounding properties. Progression occurs when a modest home in an expensive area sees a relative increase in value. The area’s racial or ethnic composition is not considered when applying conformity.

Productivity as a Measure of Value: This section addresses production from an economic❓ perspective (wealth creation) and how it can be used to measure the value of land and improvements.

Factors of Production: The four factors of production are capital, land, labor, and coordination❓ (management/entrepreneurship). These factors generate a return in the form of income or profit. The rate of return or profit, relative to the amount of invested resources, is a measure of productivity and value.

Types of Value: The chapter distinguishes between different types of values, emphasizing the importance of identifying the standard of value, including investment value, use value, liquidation value, insurance value, assessed value, going concern value, and market value.

Market Value: The most common type of value estimated in real estate appraisals, defined as the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, with both buyer and seller acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.

Implications:

• Valuation Accuracy: Understanding and applying these principles ensures a more accurate property valuation, reducing over or under-valuation.
• Informed Decision-Making: These principles help investors, developers, buyers, and sellers make informed decisions about buying, selling, or developing properties.
• Compliance with Professional Standards: These principles are essential to professional appraisal standards, ensuring reliable and credible appraisals.
• Avoiding Bias: The chapter emphasizes avoiding bias and discrimination in the valuation process, especially regarding an area’s racial and ethnic composition.