From the Ground Up

by

Published: November 27,2000

With the announcement that Nissan will be coming, land in Madison County will probably get a lot more expensive. Just how much so remains to be seen. The news is an

excellent example of the real estate appraisal principle known as “anticipation.”

The value of real estate is affected by many factors. In this column we will examine the basic principles of value. The principles apply to real estate and most personal

property for that matter. There are 11 of these principles. Let’s begin with the one that is currently acting strongly on Madison County.

1. Anticipation — this principle states that if the market believes that something beneficial or negative might happen in an area, then property values will be affected.

When General Motors announced that its new Saturn automobile manufacturing plant would be located near Spring Hill, Tenn., reports were published of land transactions

that doubled in price over the weekend after the announcement.

So far I have not heard of similar stories in Madison County, but such news would not surprise me at all. Property values can also go down in anticipation of bad news.

For example, if it were believed that a large tract of land was about to be declared a contaminated site then its value and surrounding properties would probably be

affected.

2. Highest and best use — the use that is legally permissible, physically possible, economically feasible, and most profitable. Generally, if a property is not put to its highest

and best use it will be less valuable. The process of determining a property’s highest and best use involves identifying the available alternative uses and then choosing the

one that generates the most income for the owner.

Zoning laws, building permit requirements, and other regulations influence the legally permissible use of a property and may increase or decrease the income to the owner.

3. Substitution — the maximum value of a property is the cost of acquiring a comparable substitute property. In other words, given a choice of two properties that provide

the same uses and benefits a purchaser would buy the one that costs less.

4. Conformity — a property’s maximum value will be achieved when it conforms to surrounding properties. For example, a property with a contemporary design house in

a neighborhood of traditional design houses would probably be worth less. Obviously, if every house is identical the values would be less even though all conform to each

other. This principle is more about similar styles and uses.

5. Supply and demand — the value of property will be affected by an increase or decrease in the supply of similar properties. Increases in supply tend to push values

downward, while demand increases cause prices to rise.

6. Increasing and diminishing returns — this principle states that there can be a point where there can be so much of a supply of something that values will fall. For

example, if there is a demand for 2,500 rental units in an area, then building 3,400 units will result in a value decrease per unit.

7. Regression and progression — regression is the principle that superior properties are negatively affected by inferior properties. Progression is the increase in value of

inferior properties located among superior properties. It’s this principle that causes me to recommend buying the worst home in the best neighborhood if one wants the

most value appreciation.

8. Plottage — merging two or more properties that are adjacent to each other may result in a higher value that the sum of the lots individually.

9. Contribution — each component of a property can be valued according to what it adds to the value of the whole. For example, a 50,000 square-foot warehouse building

with a quarter-acre concrete parking lot sold for $300,000 and a similar building with a half-acre concrete parking lot sold for $320,000.

Therefore, the extra quarter-acre parking lot contributed $20,000 to the total value.

10. Competition — excess profits attract competition. When builders are making above- average profits on a certain style or type of building, look for other builders to start

building the same thing.

11. Change — nothing stays constant. Property values are affected by changes in the surrounding area, be demographics, by consumer preferences, by government

regulations, etc.

Those are the basic principles of value. Look for each of them to come into play as Nissan makes its move into Mississippi. But Nissan is just one example because it is

currently in the news. Don’t forget the Delta farmland next to the casino or the vacant lot next to the new hotel on the Gulf Coast or the woods and fields in the path of

Southaven growth.

Smart buyers and sellers understand these principles, watch for their effect and act accordingly.

Phil Hardwick’s column appears regularly in the Mississippi Business Journal. His e-mail address is cpajones@msbusiness.com.


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