Real Estate Appraisal Principles and Concepts
The foundation: value, price, and cost
Appraisal rests on distinguishing market value from price and cost. Market value assumes an arm's-length transaction, both parties informed and acting without undue pressure, and reasonable exposure time. Price is what a particular sale actually brought; cost is what it takes to build. A common exam trap is a question asking for "value" when the answer should be price or cost - read the stem carefully.
Core economic principles
Candidates must know highest and best use, substitution (buyers will not pay more than the cost of an equally desirable substitute), contribution (the value a component adds to the whole), anticipation (value reflects expected future benefits), balance (optimal mix of land and improvements), conformity, progression and regression, and externalities. Increasing and decreasing returns explain why adding features eventually stops adding value.
Market analysis and competition
Understand supply and demand, market segmentation, and the four agents of production - land, labor, capital, and entrepreneurship. Competition and change are dynamic forces; appraisers must identify the market area and the forces (social, economic, governmental, environmental) affecting value.
Traps to expect
- Confusing principle of substitution with contribution.
- Treating assessed value or insurable value as market value.
- Assuming a single sale sets value; one sale is evidence, not proof.
Rule of thumb
When a question asks which principle explains a buyer's ceiling, answer substitution. When it asks why a pool adds less than its cost in a small neighborhood, answer contribution or decreasing returns.