FORCES INFLUENCING VALUE

FORCES INFLUENCING VALUE

The value of real estate is created, maintained, modified and destroyed by the interplay of the following four
great forces:

1. Environmental and physical characteristics. Examples of physical characteristics include: quality of
conveniences; availability of schools, shopping, public transportation, churches; similarity of land used;
and types of physical hazards. Environmental considerations include climate, soil and topography, barriers
to future development (oceans, mountains, etc.), transportation systems, and access to other areas/regions.

2. Social ideals and standards. Examples of social forces include: population growth and decline; age,
marriage, birth, divorce and death rates; and attitudes toward education, recreation, and other instincts and
yearnings of mankind.

3. Economic influences. Examples of economic forces are: natural resources; industrial and commercial
trends; employment trends; wage levels; availability of money and credit; interest rates; price levels; tax
loads; regional and community present economic base; new development trends; and rental and price
patterns.

4. Political or government regulations. Examples of political forces include: building codes; zoning laws;
public health measures; fire regulations; rent controls; environmental legislation controlling types of new
development; fiscal policies; monetary policies; government guaranteed loans; government housing; and
credit controls.

Each and every one of these many physical, social, economic and political factors affect cost, price, and value to
some degree. The four forces interweave and each one is in a constant state of change.

Factors Influencing Value

Directional growth. In any estimate of value, attention should be given to “the city directional growth” as well
as to “Urban Renewal Plans.” The city directional growth refers to the manner and direction in which the city
tends to expand.

Properties in the direction of growth or renewal in different sections of the city tend to increase in value,
especially if the growth or renewal is steady and rapid.

Location. Location is an exceptionally important value factor because location influences demand for the
property. Location must not be described too generally, and is an effective value factor only when it is
specifically related to highest and best use. Brokers often claim, “The three most important characteristics for
any property are location, location and location.”

Utility. Utility includes the capacity to produce. Another word for utility is “usefulness.” This important factor
involves judgment as to the best use to which a given property may be put. Building restrictions and zoning
ordinances affect utility.

Size. The width and depth of a parcel of land will often determine the possibilities and character of its use.

Corner influence. Corner sites sometimes have higher unit value than a site fronting on one street only.
Disadvantages include loss of privacy, higher cost as off-site improvements cost more and lot maintenance is
more expensive, and setbacks may require a smaller size house. Commercial properties benefit from corner sites
because of easy access and added exposure.

Shape. Parcels of land of irregular shape generally cannot be developed as advantageously as rectangular lots.

Thoroughfare conditions. The width of streets, traffic congestion, and condition of pavement have an effect on
the value of frontage properties and to a lesser degree on other properties in the neighborhood. Highly
trafficked streets are conducive to value for commercial properties but negatively affect value for residential
uses.

Exposure. The south and west sides of business streets are usually preferred by merchants because pedestrians
seek the shady side of the street on warm afternoons and merchandise displayed in the windows is not damaged
by the sun. This traditional view in older commercial districts is somewhat offset by new architectural concepts
(e.g., shopping malls), parking and convenience.

Character of business climate. Larger cities develop residential, shopping, financial, wholesale, and industrial
districts.

Plottage or assemblage. An added increment of value when several parcels of land are combined under one
ownership to produce greater utility than when the parcels are under separate ownership.

In highly urbanized multiple residential and commercial areas plottage, or assemblage, makes it possible to gain
that higher utility. An example of this would be a density bonus for the combining of residential lots. This
principle may also apply to light industrial areas.

Topography and character of soil. The bearing qualities of the soil may affect construction costs. Extensive
foundations are usually necessary in soft earth. The type and condition of the topsoil affect the growth of grass,
plants, shrubs and trees. Value may also be influenced by land contour and grades, drainage and view points.

Obsolescence. Appraisers consider two types of obsolescence: functional and external. External obsolescence
is caused by external factors or economic changes outside the boundaries of a property. External obsolescence
is not curable.

Functional obsolescence is caused by either a deficiency or a superadequacy. An example of a superadequacy,
or over-improvement, would be a swimming pool that costs $60,000 to construct while the market is only
willing to pay $10,000 for the pool. Functional obsolescence is categorized as curable or incurable. Curable
functional obsolescence will provide a positive return if repaired. This occurs when it costs less to correct the
deficiency than the market is willing to pay for it. An example would be the replacement of a heating system
that would cost $3,000 when the market is willing to pay $10,000 for a home with the new system. Incurable
functional obsolescence occurs when it would cost more to correct a deficiency than the market is willing to pay

for the correction. Changes in types and methods of construction, style of architecture, or interior arrangements
for specific purposes may render a particular building out of date. Changes in the uses of neighboring property
may also contribute to the obsolescence of a building. Careful appraisal will consider the potential for
remodeling, refurbishing or other method to restore value.

Building restrictions and zones. These sometimes operate to depress values and at other times to increase
values.

For example, there may be a vacant lot on a residential street which will sell for only $150 a front foot for single
family residential use but would sell for $600 per front foot as an apartment site. Or a vacant lot in a zoned area
may sell for more per front foot as a business site because of the supply of business sites being restricted by
zoning.

Tract layouts. In the study and valuation of unimproved but potentially valuable industrial lands, it is often
necessary to have the assistance of a competent engineer who is familiar with plant and tract layouts.

Additional Factors Important for Agricultural or Farm Lands

Present trends show larger and fewer farms, fewer farm buildings per acre, and fewer family-style operations.
The type of buildings an appraiser usually finds on agricultural lands include residences, machine sheds, poultry
sheds, multifunctional barns, silos, and various animal shelters. According to some experts in the field, farm
buildings contribute less than 20% of the total property value.

One important factor in estimating the value of agricultural land is the nature and long-term trend of costs and
prices for the crop grown or intended to be grown. For example, if the property is to be used as a dairy farm the
appraiser must consider: whether the soil is suitable for hay and grain; water supply for the cattle and crops;
proximity to markets; climatic conditions; labor conditions, etc.

Farm land valuation is highly specialized and often requires the assistance of soil and crop experts and appraisal
specialists to evaluate irrigation systems and other equipment and machinery.