By: Jason Maxwell
Submitted: 2010-08-03 06:52:21 | Word Count: 616
Understanding how the real estate industry works is important especially when you are considering to buy a real estate property. If you are planning to be a real estate agent, then this becomes more important.Timing is important when you buy properties as investment. Understanding how this works will mean that you need to consider why the values of real estate properties change.
First and foremost, let us define some real estate terms that we are going to use. The use or characteristic of a property to gratify a person's desire or have control over other properties in exchange is referred to as Value. There are three elements of value: scarcity, the rarer the property, the higher its price; utility, how the property is to be used; and demand, the more people in need of it, the higher the price.
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Cost is the blend of factors of production to produce development. It may be directly or indirectly proportional to value depending on the wisdom behind it. The cost will also be dependent on the repairs, if there are any, done to the house. The person's expression of his desire for a certain property which is quantified in monetary terms is referred to as Price. It may be higher, equal to, or lower than the value depending on the buyer's information, whether he was coerced to do it, or depending on how much money he's got.
Now, there are economic rules for value. The rule of highest and best use says the value of a property is directly proportional to its use. Value is produced from the most plausible use of the property. The property's current use may not be its highest value.
The next is the rule of substitution. Generally, a corresponding replacement or option is given to every good or service. The highest value of a property is placed by the cost of attaining an equally attractive and precious alternative property, assuming that there was no costly setback in getting such property.
Then there's the rule of conformity. This is the concept that a house will most likely increase in value if its size, condition, age, and style is the parallel to other houses in that neighborhood.
The rule of progression states that the value of a house of a lesser quality will appreciate if associated with other houses with a higher quality in the same vicinity.
The rule of regression, in the same note, follows that a property of higher quality that is located in a neighborhood of houses of lower quality depreciates to the same value as that of the said neighborhood.
The rule of increasing and diminishing returns is a concept in economics that states that if one factor of production (number of workers, for example) is increased while other factors (machines and workspace, for example) are held constant, the resulting increase in output will level-off after some time and then decline. Although the marginal productivity of the workforce decreases as output increases, diminishing returns do not mean negative returns until (in this example) the number of workers exceeds the available machines or workspace. In everyday experience, this law is expressed as "the gain is not worth the pain."
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If you want a deeper understanding of how the industry works, enroll in a real estate seller agent and buyer agent basic course and be among the best realtors. But if you just want to buy a house without a realtor or with one, it would pay to know what these professionals know so when it's your time to shine in the world of real estate as an investor, you'll be ready for it.
