Real estate has several unique characteristics that affect its value. There are economic characteristics and physical characteristics. Real estate is a commodity to buy but it is different from everything else because of the characteristics that will be discussed here.
Economic traits that influence value are rarity, upgrades, permanence, and area preference. Scarcity is simply demonstrated in the saying: “They don’t do anything anymore”. The supply of land is capped and cannot be produced more than what exists today. This value of this offer is however influenced by other characteristics.
Improvements, such as buildings on a parcel of land, can affect the value of neighboring parcels or the community as a whole. If a big business builds in a certain poor neighborhood, the value of their life will probably increase due to the introduction of jobs. This value would impact nearby communities, thereby increasing the value of real estate in those areas in some way.
Permanence is tied to infrastructure. As buildings, houses or other structures are demolished, infrastructure such as sewers, drainage, electricity and water remains intact. Permanence affects real estate or type of infrastructure. If you buy land in an area with no utilities, drainage or paved streets, it will likely be worth less than land with intact and developed infrastructure.
Area preference refers to the choices of people in a given area. It’s what most people usually refer to as “location, location, location” when talking about real estate. The location of a preferred area, for whatever reason, is what makes home values higher. Conversely, the location of a non-preferred area, for whatever reason, is what lowers home values. 8000 sq ft new homes on the coast of Long Island, East Hampton will be worth much more due to their area preference, on an area with 1200 sq ft starter homes in the middle of Long Island, located next to a dump.
The physical characteristics of the earth represent its indestructible nature, its immobility and its non-homogeneity. Working backwards, we will start with non-homogeneity. It simply indicates that no two plots are the same. Two plots can be very similar, but each plot is geographically different because each plot is located in a different location. This includes two lots right next to each other. It is important to remember that parcels are created by subdividing land, so a large parcel of 20 acres is subdivided, each individual lot becomes its own separate piece of land.
Earth cannot be moved, so it is stationary. Even when the ground is torn from the ground, the part of the Earth’s surface will always remain. It is important here to note how this physical characteristic affects the law and the real estate markets. The immobility of land is why real estate laws and markets are local in nature.
The indestructibility of the earth simply means that it is durable and cannot be destroyed. It can be damaged by storms and other disasters, but it stays and withstands changing times and will always be there. This is one of the main reasons why land is considered a good investment.
So, the basic characteristics of real estate include scarcity, land improvements, permanence, area preference, non-homogeneity, indestructibility, and immobility. Please note that there is a big difference between land and real estate. Land is the part of the earth’s surface, underground and the air above. Real estate is anything that becomes attached to the land. So when looking for investments, it is important to note the infrastructure of the area, the surrounding neighborhood and the preferences of the area or… location, location, location!