Chapter 4
Appraisal Principles

Economic Principles

u   Increasing and decreasing returns--Consider a shopping center with a parking ratio of 2 spaces per 1000 sq. ft. of leasable space.  Most experts suggest he need of 3 spaces per 1000.  If a developer adds another space per 1000, the value of the extra space should exceed the cost.  If the developer adds still 2 more spaces per 1000, then the value increase in the property would not likely cover the additional cost.

u   Opportunity cost (principal of substitution)--Will pay no more than…

Economic Principles (cont.)

u   Marginal productivity (contribution)--value is the price of the last unit produced

u   Balance

u  Internal balance--components must be in balance--The six bedroom one bath home will sell for less than a six bedroom two bath home less the cost of the additional bathroom.

u  External balance--The market must be in equilibrium for the value of an additional property to be equivalent to the values of preexisting properties.

Economic Principles (cont.)

u   Conformity--The property must generally conform to the norm demanded by the market in order for the value to be based upon that norm.

u   External economies and diseconomies (externalities)

Highest and best use

u   Highest and Best Use of a Property as Vacant

u   Highest and Best Use of a Property as Improved--Itemizing curable depreciation.

u   Purpose of Highest and Best Use Analysis

Sample Highest and Best Use Statements:

u   “The highest and best use of the subject property as vacant is a 2200 sq. ft. convenience store with three islands of two gasoline pumps per island and one truck island with diesel.  Store should contain a fast food and/or deli counter.”

u   “The highest and best use of the subject property as improved is to convert the property from a residential use to a small office use.  The existing side yard should be converted into a paved 8-car parking lot.”