Reference no: EM133034091

Question:

If purchasing a single-family home as a  personal residence, would pay more for the "perfect" house or would buy the house that needs work and build/rehab it to fit the dreams? Use the knowledge about appraisal and construction to support your answer.

Source:

BASIC VALUE PRINCIPLES

It is the appraiser's task to recognize the factors that influence market value as early and as thoroughly as possible. As you study the basic value principles defined in this section, keep in mind that new concepts are constantly making an appearance. For example, many neighborhoods are now undergoing what is termed gentrification as buyers return to close-in urban and suburban areas, acquiring older buildings and investing money and labor in restoring their purchases.

HIGHEST AND BEST USE

The highest and best use of real estate is its

• most profitable,
• physically possible, and
• legally permissible use.

The highest and best use study can be made of a vacant site or a site to be redeveloped. If a structure exists on the property, the cost of renovating or demolishing that structure is considered.

BALANCE

In general, a balance of varying land uses results in the highest property values overall. For example, housing should benefit from its proximity to places of employment and shopping areas.

SUPPLY AND DEMAND

The principle of supply and demand reflects the relationship between the number of properties on the market at a given time and the number of potential buyers. All other factors being equal, prices tend to rise if demand is greater than supply. Prices tend to fall if supply exceeds demand.

Real estate markets tend to be most stable when there is a moderate oversupply of properties on the market relative to demand. To some extent, this reflects the fact that the marketplace usually includes sellers who can "wait out" a slow market or take their properties off the market for a time (rather than lower the asking price).

CONFORMITY

Buildings exhibit conformity when they are similar in design, construction, and age. Particularly in residential neighborhoods, all property owners usually will benefit when there is consistency in the quality of design and construction, even when architectural styles vary.

PROGRESSION AND REGRESSION

The value of a building is enhanced if buildings around it have a higher value, typically because they are better maintained, better quality construction, larger, or a combination of such factors. This is an example of the principle of progression.

According to the principle of regression, a building's value declines if the buildings around it have a lower value. For example, no matter how beautiful or extravagant a house is, it will not realize its full market potential if it is in a neighborhood of smaller, lower-quality (and thus less valuable) houses.

CONTRIBUTION

An improvement adds value only if it is what buyers want.

A property improvement may or may not increase the property's overall market value, regardless of the cost of the improvement. In an appraisal, a property improvement is valued at only its contribution to the property's market value. The addition of a second bathroom, for instance, probably will contribute more of its cost to the market value of a house than a finished basement. The contribution to value of individual improvements will depend on market demand for those improvements. The National Association of Home Builders (NAHB) tracks the market value of common home remodeling projects in various regions of the country. Check www.nahb.org for the latest home remodeling cost survey.

COMPETITION

NAHB

Commercial properties are affected by competition, both positively and negatively. As businesses are attracted to a particular area, interest in the area generally increases. At a certain point, however, the market will become saturated and some businesses will suffer. In Silicon Valley, for example, office construction often falls behind market demand. Competition has brought attention to the benefits offered by the area (such as a skilled work force) and enabled property owners to profit. In a booming market, it may be difficult to remember that there can also be times in which "see-throughs" (vacant new office buildings) are common.

CHANGE

As residents of California are well aware, real estate-land-is subject to a wide range of natural and other influences. Real estate undergoes constant change from

• physical,
• economic,
• social, and
• political forces.

A change may be subtle or catastrophic. Physical changes include the gradual accretion of soil along a riverbank that increases a property's size, as well as the earthquake that renders a structure uninhabitable within seconds. Economic forces include the availability of jobs, transportation, and credit. Social forces include subjective factors that influence our decisions on lifestyle, family planning, education, leisure, and retirement. Zoning, building codes, rent control, and other restrictions on property use are political forces that can be used to encourage, discourage, or even prohibit land development.

LIFE CYCLE

Both buildings and neighborhoods go through life cycles. As they are developed, they achieve growth, attain a period of equilibrium (or stability) in which little change is evident, then decline as properties deteriorate. By the time the first three stages of the cycle have been completed, the properties involved will show the effects of wear and tear, even when they have been adequately maintained. If otherwise well located, they will attract the investment needed to keep up increased maintenance and undergo a fourth stage, revitalization, before they begin another cycle of gradual deterioration.

ANTICIPATION

Real estate is purchased for its expected future benefits. Because real estate values historically have increased, the expectation or anticipation of purchasers usually is that values will continue to rise. Purchases based on that anticipation add to market demand, which helps fulfill the expectation. Real estate values are still affected by property affordability and tend to do best when first-time homebuyers are able to enter the market.

SUBSTITUTION

The principle of substitution is that value tends to be decided by the cost of acquiring an equally desirable property. This principle provides the basis of most residential real estate appraisals. The appraiser determines the value of a property that is comparable to the one being appraised and applies that value to the subject property. If there are two comparable properties, the one with the lower price will attract the greatest demand.