Concept of Value
Real estate value is not just a price number. It reflects how buyers and sellers in a market react to location, condition, timing, and alternatives. This section builds the foundation for appraisal and pricing.
Key Definitions
Market value - The most probable price a property should bring in a competitive, open market with typical financing and a reasonable time to sell.
Market price - The amount a property actually sells for. It can be higher or lower than market value.
Cost - The amount required to produce or replace a property. Cost does not always equal value.
Assessed value - The value assigned by a tax assessor for property tax purposes. It can be higher or lower than market value depending on local rules.
Exam Tip: Market value is an opinion of value. Market price is a fact.
Characteristics of Value (DUST)
Value is created when the four characteristics below exist:
- Demand - People want the property and have the ability to pay.
- Utility - The property is useful and meets a need.
- Scarcity - The property is limited in supply.
- Transferability - The title can be transferred without major defects.
If one element is missing, value is reduced. For example, a house with title problems loses transferability and likely loses value.
Principles of Value (Core Appraisal Logic)
Appraisers and agents use value principles to explain why a property is worth what it is worth.
Table: Principles of Value
| Principle | Meaning | Simple Example |
|---|---|---|
| Substitution | A buyer will not pay more for a property than a comparable substitute. | Similar homes set a price ceiling |
| Anticipation | Value reflects future benefits. | Buyers pay more for expected appreciation |
| Change | Real estate markets are always changing. | Neighborhoods can improve or decline |
| Conformity | Value is highest when properties are similar to neighbors. | A modest home fits a modest area |
| Progression | A lower-priced home benefits from higher-priced neighbors. | Starter home near luxury homes gains value |
| Regression | A higher-priced home is pulled down by lower-priced neighbors. | Luxury home in a modest area loses value |
| Contribution | An improvement is worth what it adds to value, not its cost. | New pool adds less value than cost |
| Competition | Excess profits attract competitors and reduce returns. | Too many new condos reduce prices |
Highest and Best Use (HBU)
Highest and best use - The most profitable legal use of a property that is physically possible, legally permissible, financially feasible, and maximally productive.
HBU is tested because it drives value. For example, a vacant lot may be worth more as a small retail site than as a single-family home, if zoning allows it.
Market Value vs. Market Price
Market price can differ from market value for several reasons:
- A buyer overpays due to emotion or competition.
- A seller is under pressure and accepts a lower price.
- A property has unique features that limit comparable data.
Appraisers focus on market value, while agents must consider both market value and current market conditions.
Applied Scenario: Value Principles at Work
A buyer chooses between two similar homes. Home A is listed at $520,000 and Home B at $500,000. The buyer chooses Home B because it offers similar utility at a lower price. This is the principle of substitution in action. If Home A wants to compete, it must justify the higher price with better features or future benefits.
Common Exam Traps
- Confusing price with value.
- Assuming cost equals value.
- Forgetting that transferability is required for value.
- Mislabeling progression and regression.
Summary
The concept of value is the foundation of appraisal. Know the definitions, the DUST characteristics, and the core value principles. These concepts appear throughout the appraisal process and in questions about pricing strategy.
Market Value Conditions (Arm's Length Basics)
Market value assumes a typical transaction. That means:
- Buyer and seller are willing and not under undue pressure.
- Both parties are reasonably informed.
- The property has adequate exposure time on the market.
- Payment is in cash or equivalent financing terms.
Note on Exposure Time
Exposure time is the period a property is on the market before it sells. A forced sale or a rushed closing can push price below market value, even if the property itself is unchanged.
Value vs. Price Example
If a home is listed at $400,000 and a bidding war pushes the sale to $430,000, the price is $430,000 but the market value may still be closer to $400,000. The higher price reflects unusual demand, not necessarily a change in value fundamentals.
DUST in Action
Consider a lakefront lot with unclear title. The land is scarce and desirable, but if transferability is questionable, value drops. Once the title issue is resolved, transferability returns and value increases, even if the physical land never changed.
Exam Application Check
If a question asks why a sale price is unusually low, look for conditions that violate typical market value assumptions, such as a distressed seller or a short exposure time.
What is the key difference between market value and market price?
Which set of terms represents the four characteristics of value?
A buyer will not pay more for a property than a similar substitute. This is the principle of:
Which principle explains why a luxury home in a modest neighborhood may lose value?
3.2 Appraisal Process
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