Term
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Definition
| Market value may be briefly defined as the highest price a buyer would pay and the lowest price a seller would accept for a property at a given time and given certain conditions in a particular marketplace. Note that this definition describes an opinion or estimate of a likely price, not an actual price. It may differ from the sale price in a transaction for a number of reasons, such as buyer and seller considerations of investment value and the effect of comparable properties. Price is not something of value in itself. It is only a number that quantifies value. |
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Term
| difference between market value and price |
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Definition
If market value is what seller and buyer might be expected to agree on given the foregoing conditions, price is the amount they actually agree to pay and accept to complete the exchange of a good or service.
In the real estate context, "price" usually refers to the final selling price; it is not the preliminary asking price of the seller nor the initial bidding price of the purchaser. Asking and bidding prices are positions in a negotiation between the parties prior to the exchange. The true price of an item or service is the final number the parties agree to. |
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Term
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Definition
| The fact that a property has a use in a certain marketplace contributes to the demand for it. Use is not the same as function. For instance, a swampy area may have an ecological function as a wetland, but it may have no economic utility if it cannot be put to some use that people in the marketplace are willing to pay for |
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Term
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Definition
| How readily or easily title or rights to real estate can be transferred affects the property's value. Property that is encumbered has a value impairment since buyers do not want unmarketable title. Similarly, property that cannot be transferred due to disputes among owners may cause the value to decline, because the investment is wholly illiquid until the disputes are resolved. |
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Term
| What does DUST stand for? |
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Definition
| Demand, Supply, Utility, Transferability-- remember DUST, the basics of real estate market value. |
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Term
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Definition
| The benefits a buyer expects to derive from a property over a holding period influence what the buyer is willing to pay for it. For example, if an investor anticipates an annual rental income from a leased property to be one million dollars, this expected sum has a direct bearing on what the investor will pay for the property. |
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Term
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Definition
| According to the principle of substitution, a buyer will pay no more for a property than the buyer would have to pay for an equally desirable and available substitute property. For example, if three houses for sale are essentially similar in size, quality and location, a potential buyer is unlikely to choose the one that is priced significantly higher than the other two. |
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Term
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Definition
| The principal of contribution focuses on the degree to which a particular improvement affects market value of the overall property. In essence, the contribution of the improvement is equal to the change in market value that the addition of the improvement causes. For example, adding a bathroom to a house may contribute an additional $15,000 to the appraised value. Thus, the contribution of the bathroom is $15,000. Note that an improvement's contribution to value has little to do with the improvement's cost. The foregoing bathroom may have cost $5,000 or $20,000. Contribution is what the market recognizes as the change in value, not what an item costs. If continuous improvements are added to a property, it is possible that, at some point, the cost of adding improvements no longer contributes a corresponding increase in the value of the property. When this occurs, the property suffers from diminishing marginal return, where the costs to improve exceed contribution. |
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Term
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Definition
| Market conditions are in a state of flux over time, just as the condition of a property itself changes. These fluctuations and changes will affect the benefits that can arise from the property, and should be reflected in an estimate of the property's value. For example, the construction of a neighborhood shopping center in the vicinity of a certain house may increase the desirability of the house's location, and hence, its value. |
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Term
| What is highest and best use? |
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Definition
This principle holds that there is, theoretically, a single use for a property that produces the greatest income and return. A property achieves its maximum value when it is put to this use. If the actual use is not the highest and best use, the value of the property is correspondingly less than optimal. Technically, highest and best use must be:
legally permissible
physically possible
financially feasible
maximally productive. |
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Term
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Definition
| This principle holds that a property's maximal value is attained when its form and use are in tune with surrounding properties and uses. For example, a two-bedroom, one-bathroom house surrounded by four-bedroom, three-bathroom homes may derive maximal value from a room addition. |
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Term
| what is progression and regression? |
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Definition
| The value of a property influences, and is influenced by, the values of neighboring properties. If a property is surrounded by properties with higher values, its value will tend to rise (progression); if it is surrounded by properties with lower values, its value will tend to fall (regression). |
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Term
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Definition
| Assemblage, or the conjoining of adjacent properties, sometimes creates a combined value that is greater than the values of the unassembled properties. The excess value created by assemblage is called plottage value. |
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Term
| what is a subdivision in terms of market value? |
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Definition
| The division of a single property into smaller properties can also result in a higher total value. For instance, a one-acre suburban site appraised at $50,000 may be subdivided into four quarter-acre lots worth $30,000 each. This principle contributes significantly to the financial feasibility of subdivision development. |
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Term
| Current and changing conditions a listing agent must keep track of include: |
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Definition
total supply of properties on the market
number of transactions during the prior month, the same month in the prior year, and the year-to-date sales versus the prior year sales
average-time-on-the-market trends
average price trends and the sold trends in a particular price range |
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Term
| real estate value in general is |
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Definition
| the present monetary worth of benefits arising from the ownership of real estate. |
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Term
| what is income in terms of market value? |
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Definition
| Ownership of real estate produces income when there are leases on the land, the improvements, or on air, surface, or subsurface rights. Such income is part of real estate value because an investor will pay money to buy the income stream generated by ownership of the property. |
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Term
| what is appreciation in market value? |
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Definition
| Appreciation is an increase in the market value of a parcel of land over time, usually resulting from a general rise in sale prices of real estate throughout a market area. Such an increase, whether actual or projected, is another investment benefit that contributes to real estate value. |
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Term
| what is use in regards to market value? |
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Definition
| The way a property is used -- whether residential, commercial, agricultural, recreational, etc. -- in large part determines the property's value. Each kind of use has its own benefits. |
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Term
| what are tax benefits in regards to market value? |
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Definition
| Depending on current tax law, tax benefits from ownership of a property may take the form of preferred treatment of capital gain, tax losses, depreciation, and deferrals of tax liability. The deduction for mortgage interest for homeowners is one common example of a tax benefit. Such tax benefits contribute to the income and potential sale price of a property. |
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