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  • Writer's pictureColleen

Economic Principles of Value

Updated: May 14




What are the Economic Principles of Value?

These are Basic economic beliefs that affect the value of a property. These are the principles used in different appraisal methods. Keep in mind that if you ask me or another REALTOR to perform a Comparative Market Analysis CMA, these are not principles that we would use because we do not appraise.



Principle of Balance

This principle refers to the relationship between cost, added cost and the value it returns. For each dollar invested, the value should increase by more than one dollar. It asserts that the maximum value of a property is achieved and maintained when all elements in the agents of production are in economic balance. This relies on the four agents of production being balanced. These four agents are: Land, Labor, Capital, and Entrepreneurship. When these components are in harmony, the property’s value is optimized.



Principle of Contribution

Value is determined by what the property contributes. If there is no water access on the property then building a dock would not add value. Building a home with an open courtyard in a rainy or cold area would not add value because it would not contribute anything valuable to the property. Basically if a feature doesn't benefit the property it won't add value. This also means that just because it added value to one individual does not mean that it will add value to others. Having a home tailored to a specific disability will add value for someone with that disability, but it will likely decrease value for those lacking the disability.



Principle of Conformity

This principle says that a particular hoe achieves its maximum value when surrounded by home of similar style and function. This is the power behind an HOA. While this principle deals with more than uniformity of home in the neighborhood, it is one of the reasons that homes in an HOA will typically value higher. This Principle however also refers to the zoning; is your street all residential, or mixed use, or commercial, or is every property zoned differently?



Principle of Externalities

These are things outside of the property entirely that effect the value of it. A new school, or prison being added in a community can both impact the value of a home very quickly without actually doing anything to any individual property. Having easy access to a grocery store, pharmacy, or entertainment in the town can add value which is why rural homes are sometimes valued at way less than you would expect. Politics and government can play a role in this as well. This principle is really just talking about everything outside of the property that would affect the property. - This principle is very intertwined both progression and regression. Progression being that the value of a property is being helped up by other properties in the area, and Regression being that the value of a property is held down by other properties in the area.



Principle of Consistent Use

This principle does not mean "has the property been vacant?" But it asks more if the property has always been used in the same way? Is the new pharmacy replacing the old pharmacy, was the single family home being sold as another single family home or has it been changed into a mixed use or a multi-family home? If a property was industrial before, then it will have a higher value to someone looking to keep it industrial vs someone who wants to have it become commercial, or agricultural.



Principle of Anticipation

This principle talks about future value. Is there a train station being built at the end of the road? Are their plans for a highway to run right through the back yard? Is the neighborhood an up and coming one? Is the style of property gaining popularity? This principle places a value based on something anticipated; whether good or bad. The anticipation of something happening or not happening effects the value of the property. This principle is the foundation of the income approach to appraisals. - This principle can bleed into progression like in the up and coming neighborhood where one home may not have been updated or remodeled but is still being valued closer to what all the other updated homes in the neighborhood are valued at.


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