What makes Property Valuation so important?

Property Valuation is a very important concept for the people associated with civil engineering projects and structures. They are the sellers, home purchasers, lenders and real estate investors etc.

Why people need to determine the worth of real estate ?

We need to determine the worth of real estate in order to make good financial decisions. Property Valuation is the process which determines the economic value of real estate.

Fair Market Value

Property Valuation seeks to determine the fair market value. A fair market value is the price at which a knowledgeable seller willingly sells his property and a knowledgeable buyer will willingly purchase it. In other words, it assumes that both the parties have all the relevant information about the property and neither are forced to buy or sell. Fair market value is not always equal to the sales price. For example, a short sale of real estate may not bring fair market value because the seller is distressed and must sell the property right away. Potential buyers know this so they have a bargaining advantage and usually get the property for less than market value.


The property valuation lies upon four important pillars:

  • Demand

  • Utility

  • Scarcity

  • Transferability

Demand - It is the magnitude of interest and buying power in the market for purchasing property.

Utility - It is the ability of the real estate to satisfy the use or need of prospective purchasers

Scarcity - It recognizes that there's a limited supply of real estate.

Transferability - It refers to the ease at which a parcel of real estate can legally be transferred to a new owner.

Property Principles

There are several important principles associated with the concept of Property Valuation:

  • Principle of conformity

  • Principle of change

  • Principle of substitution

  • Principle of supply and demand

  • Principle of highest and best use

  • Principle of progression

  • Principle pf regression

  • Principle of contribution

Principle of conformity

It states that the real estate whose use and style conforms with property in the immediate area usually has a higher value than property that doesn't.

Principle of change

It recognizes that various forces act upon and change the real estate market and property values.

For example, pollution that spills into a residential neighborhood is an environmental change that would lower property values.

Principle of substitution

The principle of substitution is simply the ability of one piece of real estate to be an acceptable substitution of another.

For example, if three-bedroom ranch homes in your neighborhood are selling for $200,000, you're not going to get much more than $200,000 for your own three-bedroom ranch home if you sell it.

This is because buyers can substitute your house for another one for that price.

Principle of supply and demand

It states that if the supply of real estate exceeds demand, prices will go down, but if demand exceeds the supply, then prices will go up.

Principle of highest and best use

The principle of highest and best use states that property will get the best price when it is being used in a way that produces the highest economic value.

For example, a single-family home in an industrial area is not the highest and best use of the real estate because an owner can get a better return by using the property for commercial use.

It is to be noted that most people don't want to buy houses in the middle of an industrial park.

Principle of progression

It states that the neighboring higher value real estate can pull up the value of lesser value property in the same area.

Also, we can say that, the worst house on the block is worth more just because it's around the best houses in the neighborhood.

Principle of regression

It is the inverse of the principle of progression. If a high- valued property is surrounded by a lower - valued property, the price of the higher value property tends to be pulled down.

Principle of contribution

It involves determining how each component of the real estate contributes to it's overall value.

For example, consider a residential lot with a house and pool.

We can consider the land, the house and the pool as separate components that add to the overall value if the real estate.

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