- Real estate sellers, buyers, and lenders need to be able 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.
- Property valuation typically seeks to determine fair market value, the price at which a knowledgeable seller willingly sells her property and a knowledgeable buyer will willingly purchase it. In other words, it assumes both parties have all the relevant information and
neither is 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 the market value.
- Property valuation lies upon four foundational pillars. Demand, the first, is the magnitude of interest and buying power in the market for purchasing property. Utility, the second, is the ability of the real estate to satisfy the use or need of prospective purchasers. Scarcity, the third,
recognizes that there’s a limited supply of real estate. Transferability, the fourth, refers to the ease at which a parcel of real estate can legally be transferred to a new owner. Many people use the acronym DUST to help remember these four important concepts