Saturday, March 3, 2012

The Principles of Anticipation & Change

    I was driving by a section of previously unused property one day.  I drove past it again several weeks later when I had noticed that the trees had been cleared and a construction company was digging a basement.  How many times do we wonder why investors and builders will spend large amounts of money for something that may not take off?  The answer is the principle of anticipation.
     The principle of anticipation states that, “Value is created by the anticipation of benefits to be derived in the future” (Appraisal Institute, 2001. p.34).  Investors and builders will develop a piece of property to its highest and best use when they are convinced that they will be able to recoup their investment plus a profit margin. 
    Another principle that goes in hand with anticipation is change.  Change is, “The result of the cause and effect relationship among the forces that influence real property value” (Appraisal Institute, 2001, p.35).   There is one aspect that you can bet on in Real Estate and be right 100% of the time: the market is going to change.  Change usually happens over long periods of time unless a large market event comes along.  Here in Kentucky, we have seen change happen very slowly.  Our markets for the most part do not see large amount of appreciation, so when the market turned south, we did not see the levels of depreciation that other states had seen.  The problem with change is that it happens very slowly, and unless you are aware that it is happening, you might miss the change.  Have you ever heard this, “I thought real estate was a safe investment, what do you mean my property has depreciated?” 
    In closing, if the real estate market is to recover, one of the ideas that has to get back into the minds of buyers across the country is that real estate will appreciate.  This will legitimize the principle of anticipation and ultimately produce change. 

1. Appraisal Institute. (2001). The Appraisal of Real Estate
      (12th ed). Chicago, IL, Author

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