Fundamentals of real estate Principles Flashcards

Fundamentals of real estate Principles Flashcards Principle of CompetitionStates that excessive profits breed competitive opportunities that then tend to destroy those profits due to the increased competition. The decrease in income affects the potential value of the business and the property.Therefore, this principle generally applies to income related

properties, such as retail operations or office supplies.EX:

A fast food outlet is built on a particular street in town. It does so well during its third year that more fast food outlets open on the same street. Sales at the original outlet decreased 50% and the value of the real estate is negatively affected by the drop in income.Principle of RegressionIs the opposite of the principle of progression. It states that when properties in the same area are dissimilar, the property with the greater value will be adversely affected (regress) in value by its close proximity to properties of lesser value in the immediate vicinity. This principle support supports the real estate adage " don't buy the best house on the street" if there are a wide disparities in the neighbourhood property types, as the superior house may

lose value when it comes time to sell.EX: The value of a

more expensive home would be negatively influenced by its proximity to the less expensive properties in that neighbourhood. It would likely sell for less than if it were in a neighbourhood of similar more expensive properties.Principle of substitution:States that the buyer will pay more more for a property than then the cost of accruing a similar and equally desirable property on the market. Therefore this principle is applicable to the decision making process of all real estate buyers & Sellers and is fundamental to all property valuations.EX there are 3 homes for sale in a subdivision one for 380, 390 & 400 the buyer chooses to purchase the one for 380 Principle of External Factors:States that various external factors can impact he value of a property, including economic political, social & physical issues. Other examples include government issues & land

use development pressures.EX: Mark bought a house on

the edge of town for 250K The town subsequently introduced an economic incentive program to attract more businesses, & a year later large meat processing plan was built 2km from his house. Depending on the wind, the odour from the plant is evident in Marks neighbourhood,

The value of his house decreased due to the negative impact of the odour from the nearby plant Principle of surplus activityRelates to the increase or decreases in the factors of production that generates surplus activity. It refers to the net income that remains after all the expenses needed for the operation of the property have been paid and the

capital invested in the operation has been satisfied.EX: A

hotel earns revenue from room rentals, food, & beverage sales, conference bookings & other service fees. The hotel pays its expenses & capital costs (financing fees,

Dividends) from the revenue earned by these various activities . The residual revenue that remains after these expenses ( net income) determines the overall value of the property.Principle of Contribution:States the value of a component (feature) relates to the overall value of the property. Specifically, the value of any property component is measured how much it adds to the

homes market valueEX: Bob wants to develop basement

by adding 18,000 and he ensures that it meets permits after a new valuation is done & shows the developments only contributes $8000 to increase the value.

Principle of progression:States when the properties in the same are dissimilar, the property with lesser value will be enhanced in value by its close proximity to properties of greater value in the immediate vicinity.EX The value of a less expensive home would be positively influenced by its close proximity to the more expensive properties in that neighbourhoods would likely sell more than if it were in a neighbourhood of similar, less expensive properties.Principle of balanceStates that the value is created and sustained when there is a balance. For EX this could refer to the balance between the amount and location of essential types of real estate within the same area or community.EX There are more grocery stores in the town of alton than the area needs or can support. This means that some of the grocery stores will succeed at the expenses of the others, or none of the grocery stores will yield an adequate return on the investment they represent Principle of changeIdentifies the dynamic of property valuation. It states that the economic, social & political factors are constantly in

play, contributing to the changing property valuesEX: chuck

bought a small house in an older inner city neighbourhood

• years ago for 300K. At the time, the neighbourhood

showed signs of deterioration. Over the last few years there is some evidence of neighbourhood renewal and the area is becoming a trendy inner city location for young professionals who want to live close to work & the city. A property valuation was done & is now worth 395K Principle of highest & best UseIs a key premise in a property valuation, as the ultimate utility of a property is the foundation of its market value.The highest & best use of any property is the use at the time of the valuation, which will likely produce the highest & best use of any property.Principle of consistent use:States when improved land is in a transition to another highest & best use, one use cannot be allocated to the land and another use allocated to the building or other improvements on the land. Therefore, consistency is required as the highest & best use for all aspects of the property, meaning the use of the property must be consistant.EX Sam wants to sell his commercial lot, which has an older house situated on it. Eli, A REP, is estimating the market value of sam's home. Eli estimates that the highest & best use for the land for a commercial development, such as an office building, therefore, Eli does not attribute any value to the older house in preparing the property valuation.