Factors of Value

There are four factors that a piece of property must have to create value. Since there are different markets all over, there are different ways people look at what is valuable to them and what is not. Appraisers have to look at that to determine how valuable a property is. Demand is what creates value (Rattermann).

The first quality that is needed to create value is utility. An item will have value only if it has use to it (Rattermann). If land for agricultural use is too hard to be used to plant corn, then it has no value in that situation. On the other hand, the land can be useful to someone else with a different reason of need. Basically, if the property can be utilized by your needs, then there is value.

Scarcity is the next quality that is needed to create value. Something that is abundant like air has no value because there is no demand for it. With something less plentiful like water to farmers in certain markets where there is no abundant amount of water, has value. Since different markets have different items that are scarce, it depends on what is valuable to that market (Rattermann).

Having desire for the item is needed as well to create value. If there is only one house in a neighborhood with a swimming pool and that’s one of the main items that a family wants when they are looking to purchase a house, then that creates value (Rattermann). Also, it brings in utility and scarcity factors as well. The last quality is effective purchasing power for the buyer. If a $1.5 million house is for sale in a community where the highest household income is $75,000/year, there isn’t enough demand for that house since no one will be able to afford it. The property must appeal to those in a market that can afford it to give it value (Rattermann).

Overall, having these four factors establishes value for the property or item. Another example is that there is only one house that has a guesthouse in a neighborhood that you would like to rent out to a college student to gain some extra income and you can afford it. The guesthouse would be utility because you wanted to obtain some income, the reason being that it’s the only one in the neighborhood is scarcity, your desire is for there being a guesthouse and the property’s price appeals to you. Without value to someone, a property is nothing.

Rattermann, M. R. (2009). The Student Handbook to The Appraisal of Real Estate. Chicago, IL: Appraisal Institute.