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PRINCIPLES OF REAL ESTATE ASSESSMENT
Real estate valuation principles are grouped into four categories.
1. Principles based on the user's perceptions - utility, substitution, expectations - allow you to determine the utility of an object, its acceptable price in the market and the expected benefits from owning a property.
Usefulness of the property - the ability to meet the needs of the user in a given place and for a certain period of time. This is the "principle of utility".
The "principle of substitution" says that the value of the property being valued should not exceed the cost of acquiring a similar object.
The utility of a property is related to the value of projected future benefits (expectation of returns). The "expectation principle" says that the value of a property includes the value of all future income and takes into account the constant growth of this value under the influence of increased demand and limited supply.
2. Principles related to the property (primarily land) and its improvement.
Economic activity requires four factors of production:
▪ labor that must be compensated by wages;
▪ capital, which must be compensated by interest and dividends;
▪ entrepreneurial activity, which must be compensated by profit;
▪ land, which is compensated by rent.
3. Principles related to the market environment - dependency, compliance, supply and demand, competition.
The value of a property is affected by and itself affects the value of other properties in the surrounding area. This is the dependency principle.
The “fitness principle” provides for the conformity of the architectural style and level of amenities (services) of new properties with the needs and expectations of the market.
"The principle of demand and assumption" - when evaluating a property, it is necessary to understand what factors and how they affect supply and demand in the real estate market.
"Principle of competition" - market demand generates profit, and profit creates competition - a force that leads to the alignment of profitability in the real estate market.
The principle that characterizes changes in the utility of real estate in a given location is the "principle of change".
4. The principle of the best and most efficient use of the property is a synthesis of the principles of all groups. It allows the appraiser to identify the best and most profitable option from the possible options for using the property and use it for evaluation. This principle provides for the evaluation of a piece of land as if it were free.
Author: Kuznetsova S.A.
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