Over the past decade, as pricing began to inflate artificially, we were lead to believe that the real estate market was lined with gold. All of the fundamentals no longer seemed to matter. Values of commercial properties were no longer correlated to income but to projected future appreciation. Residential properties were experiencing a similar scenario where you could not lose. People were anticipating that the market would forever increase and the Market Value of their properties would do nothing but compound.
Some of the fundamentals ignored were as follows:
Competition: If a certain type of property is introduced to an area and begins to sell at higher than normal prices then this will cause other properties of similar caliber to be built in hopes of attracting similar results. Example: A $600 home is built and sells quickly in close proximity $250k properties. A new subdivision is then built with homes in the $600k range.
Conformity: Value is created when a property is in harmony with its surroundings. Maximum value is realized if the use of the land conforms to existing neighborhood standards.
Contribution: the value of any part of the property is measured by its effect on the value of the whole.
Example: Installing a swimming pool may not add value to the property equal to the cost.
Highest and Best Use: The most profitable single use to which a property may be put, or the use that is most likely to be in demand in the near future.
Increasing and diminishing returns: The addition of improvements to land and structures increases value only to the asset's maximum value. Beyond that point, additional improvements no longer affect a property's value. As long as money spent on improvements produces an increase in income or value, the law of increasing returns applies. At the point where additional improvements do not increase income or value, the law of diminishing returns applies. (There is an easy formula that can be used to find this threshhold)
When the bottom fell out of the market, all of these principles came flooding back and left property owners in complete shock and financial ruin. These principals are here to stay until we have some sort of artificial influence that allows us to make the same mistakes all over again. Until that time, property owners who made mistakes will be forced to hold, sell at fair market value, or walk away.
Hold on...time out!! This is not a perfect world...not everyone has this information, common sense, or knows the value of a dollar. Sometimes people just want what they want and are willing to pay the price.
I completely agree. The market is imperfect no matter how much we analyze the numbers. Buyers and sellers do not have all the information that the most educated agents possess. Therefore, it is our conclusion that there are outliers that skew the numbers but they are few and far between. These outliers occur much more often in waterfront communities, vacation communities, etc. We rarely see outliers occur in residential communities that do not have a very specific draw that increases the value of land.
The issue today is not only that "dumb money" is hard to find, but a certain phrase in most offers that states "Property must appraise at or above the purchase price".
There are very effective strategies used to dispose of these properties but they include intense marketing, proper pricing, and a willingness by all parties to accept the reality of the market we are in .
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