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.
