Any improvement to a property, whether to vacant land or a building, is worth only what it adds to the property's market value. An improvement's contribution to the value of the entire property may be greater or smaller than its cost. A licensee's opinion should be governed by a feature's contribution to value, not its actual cost.
Improvements to land and structures can reach a point at which they have no positive effect on property values. As long as money spent on such improvements produces a proportionate increase in income or value, the law of increasing returns is in effect. When additional improvements bring no corresponding increase in income or value, one can observe the law of diminishing returns.
Smaller homes in a neighborhood of larger homes may experience increasing returns when improved. Homes that are the same size or larger than surrounding homes should not be improved significantly until the owners have considered the economics of their decisions.
Information courtesy of Rowlett Real Estate School LLC
P.Stone, RRES
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