What are elements of value?

Elements of value involve numerous factors which are used in the appraisal process to help determine a property’s fair market value (FMV).

The FMV of a property is the highest price on the date of valuation a willing seller and buyer would agree to, both having full knowledge of the property’s various uses. [Calif. Code of Civil Procedures §1263.320]

The appraisal process includes the creation of an appraisal report, which contains data collected and analyzed by an appraiser to substantiate their opinion of the property’s value on a certain date. From the perspective of an income property investor, the value of a parcel of real estate, given as a dollar amount, is the present worth of the future flow of net operating income (NOI) generated by the property.

Elements of value used in the appraisal process include:

  • demand – the number of buyers for the property;
  • utility – the property’s possible uses;
  • scarcity – the availability of similar properties; and
  • transferability – the seller’s ability to transfer good title to a buyer clear of all encumbrances itemized in a title insurance policy.

These elements of value can be memorized with the acronym DUST.

Other forces which influence value include:

  • physical considerations – the property’s proximity to commercial amenities, access to transportation, the availability of freeways, beaches, lakes, hills, etc.;
  • economic considerations – rents in the area, vacancies and the percentage of homeownership, as well as employment opportunities lost or gained;
  • government considerations – property taxes, zoning, building codes, and local services such as police and fire protection; and
  • social considerations – crime rates, school ratings, shopping and recreational opportunities.

These forces that influence can be memorized with the acronym of PEGS.

Factors not used to determine a property’s value include the present owner’s:

  • acquisition cost;
  • listing price;
  • mortgage financing; and
  • equity in the property.