Enter your DRE license or name above to continue reading

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.