Law of Increasing and Diminishing Returns An improvement’s contribution to the value of the entire property may be greater or smaller than its cost. ContributionĪny improvements to a property, whether to vacant land or a building, is worth only what it adds to the property’s market value. Subdivision restrictive covenants are designed to promote the principle of conformity to maintain and enhance values. An elaborate mansion on a large lot with a spacious lawn is worth more in a neighborhood of similar homes than it would be in a neighborhood of more modest homes on smaller lots.
In neighborhoods of single-family houses, buildings normally should follow the principle of conformity, that is, they should be similar in design, construction, and age to other buildings in the neighborhood to realize their maximum value. For example, when interest rates decline, demand for residential property increase significantly, resulting in dramatic increases in prices. Property value rises as demand increases or supply decreases. Law of Supply and DemandĪs it does with any marketable commodity, the law of supply and demand affects real estate. A property’s highest and best use is its most legally profitable and physically permitted use – that is, the use that provides the highest present value. Of all the factors that influence market value, the primary consideration is the highest and best use of the real estate. The maximum worth of the real estate is influenced by the cost of acquiring a substitute or comparable property. The value of a given parcel of real property is determined using the principles of substitution. Substitution is probably the most important factor in pricing residential property in a neighborhood with an active market. The following principles are important: Substitution They are interrelated, and their relative importance varies, depending on local conditions.
Many economic principles influence the value of real property.
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