The four important ingredients of Real Estate Value
Like baking a cake, if you don’t have the right ingredients you don’t have a cake. The four important ingredients of Real Estate Value must be present to understand the value of the property. The four ingredients or elements of real estate value that must be present are utility, scarcity, demand, and transferability.
The utility of the property refers to its usefulness. The more useful a property is, the greater its potential value. Utility can be general like a standard house or specialize like a purposive built structure. The advantage of a building with strong utility is greater value. Deficiencies in utility lessen the value.
Scarcity means lack of quantity. Insufficient supply of properties puts the price higher. An oversupply of houses drives the price down. But this concept does need to be taken in the context of the whole economy and other factors that change this basic supply demand equations.
Demand refers to the desire to own real estate, coupled with the financial ability to buy. Just like scarcity, if there is heavy demand the price should rise or be worth more. The heart of real estate value is the supply demand equation. But as we’ve seen in the last few years and in other boom and bust cycles, the equation needs to be tweaked to take in the full value situation.
Transferability refers to the ability to transfer identifiable ownership of the property. This is a complicated subject. But for the purpose of this blog adding transferability into the equation of real estate value will help in understanding the need for clear title. If you can’t transfer the title of the property into your name how much is that worth? If the whole building needs to be torn down before the ownership can change, how does that impact the value?
Mixing the four basic ingredients of Real Estate Value together creates the real estate value. Other factor can and do have an impact on the value. But understanding the interplay of four elements of utility, scarcity, demand, and transferability will yield the bases of property value.
Coffee Real Estate
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