You might be familiar with some homeowners and prospective home buyers discussing the advantage of purchasing the cheapest house in a block. It is a piece of good advice since homes encircled by higher-valued properties also get their value to increase.
This part is where the principle of progression becomes important.
The principle of progression plays a vital role in determining the value of a property. Many factors can impact a property’s value.
It’s essential to check the properties surrounding it, the social and economic progress, the patterns of migration, and retailers.
In this article, we will define what the principle of progression is in real estate. We will discuss how this principle is applied with examples for you to understand the subject better.
A brief comparison will also be found in the latter part of the article, together with the factors affecting the principle of progression.
What is the Principle of Progression?
The Principle of Progression refers to the thought that a house’s value will increase with more valuable homes surround it in a given area. It is the opposite of another principle which is the principle of regression.
We will talk more about the principle of regression later. For a quick background, this principle refers to the idea that more prominent and more expensive houses depreciate when surrounded by smaller and less valuable homes.
In real estate, a house’s value fluctuates as people migrate into and out of different neighborhoods. The prices can go up and down depending on the current supply and demand for homes in a particular area.
It is crucial to be aware of the principle of progression since this contributes to real estate appraisal. Real estate appraisers use the values of the surrounding properties when identifying the final price for a specific house.
Prospective homeowners can also use this principle advantageously when searching for properties. One may opt to select a house situated in a favorable neighborhood or an area that is for redevelopment.
When purchasing a house, it is vital to remember that you have the option to move to smaller properties. Still, it is not a guarantee that it will be cheap if the surrounding properties are expensive.
Likewise, getting an expensive home in an isolated area can deprecate its values.
Applying the Principle of Progression
It is pretty easy to understand the principle of progression in real estate. Think that if you reside in an expensive neighborhood, then the property values will definitely increase all around you.
On the other hand, living in a community with cheaper deals of homes will most likely decrease the value of your property.
If we apply it, you should expect a mansion residing in a manufactured home park will not sell for a significant profit. You will also most likely lose money in this situation.
Another application is if you reside in a home that is not of great value but in a neighborhood filled with expensive houses. You can expect that the value of your house will increase since homes surround you with more excellent value.
Manuel bought a house located in a lovely neighborhood. The homes surrounding his property are worth approximately $600,000 to $850,000.
Most of the house lots are vast, with lawns, and consist of detailed landscaping.
The people residing in the neighborhood own luxury cars and have personal assistants. Manuel’s house will probably cost around $300,000 if it is located in another community.
However, applying the principle of progression, since its location is in a luxurious neighborhood, then his house will have an increase in its value.
Real Estate Appraisers Using the Principle of Progression to Value Properties
Real estate appraisers must understand the principle of progression since they frequently use it to determine the value of a property. Real estate appraisers value properties such as commercial buildings and homes.
It is part of their duty to value properties as part of acquisitions, purchases, divorce proceedings, commercial sales, mergers, and prospective homeowners.
This principle is the key to closing a deal for a buyer during the purchasing process of a house.
In determining a property’s value, the real estate appraiser compares the importance of the properties surrounding the property for sale.
Here are some of the things that real estate appraisers look into when comparing property values:
- Home amenities
- Home square footage
- Home upgrades
- Overall home size
These determinants help in assigning a value for each square foot of a property. Real estate appraisers put the houses that they are comparing in charts with dots on a graph.
These charts and graphs will present the current trends in a neighborhood. Upward trends mean greater property values that are in line with the principle of progression.
Examples Using the Principle of Progression
Houses located in great neighborhoods can appraise for more significant amounts compared to similar homes in poor communities. It is applicable even if the property is worth significantly less than the houses encircling it due to the principle of progression.
For example, if your house is valued at $100,000, search for smaller homes encircled by expensive homes. In the perspective of investments, this is a better deal than spending money on bigger houses.
That’s assuming it’s situated in a neighborhood with depreciating property values.
Assume that you have a two-bedroom, one-bathroom home in Neighborhood #1, a middle-class neighborhood full of older homes. In this neighborhood, your home value is around $220,000.
Take another community for an example, which we will call Neighborhood #2.
Now, Neighborhood #2 has newer homes with five to six bedrooms and at least three bathrooms. It is also located near the bus station, and many retail shops are within walking distance.
If you place the same home in Neighborhood #2, the value goes up to $320,000.
Principle of Progression vs. Principle of Regression
Since we have a principle of progression, we also have the principle of regression. The principle of regression is the opposite principle that goes hand in hand with the principle of progression.
The principle of regression states that a house surrounded by lower value properties will lead to its value depreciating. It means that even if your home has good amenities and qualities, you should expect the property value to decrease still because it is affected by its surrounding properties.
Factors Affecting the Principle of Progression
The principle of progression is real estate’s principle that, together with the appraisal industry, states that properties with lower-end values CAN increase if surrounded by higher-end properties.
In a sense, it presents a positive effect on houses located in the same neighborhood.
The presence of certain factors in the neighborhood where a property is located affects the principle of progression. These factors can increase the property values and appraisal values of homes:
- Closer to public transportation
- Closer to high-ranking schools
- The high median income of residents
- Accessible to retail and recreational facilities
- Decreased crime rates
- Aesthetic presence of neighboring properties
- Treasured trees
- Primed lawns
- Luxury homes
The principle of progression presents positive externality in the economy. In this concept, bystanders and objects experience a positive effect from the qualities and acts of another being.
In houses, the location and neighborhood play a vital role in determining their value. Properties will have unpredictable prices in the real estate market, even if they have the same features in different neighborhoods.
The principle of progression plays a crucial role in determining the value of a property. You can apply the principle of progression and use it to your advantage when searching for a new home.
Of course, it is recommendable to purchase the best house that fits your budget in a neighborhood that suits your needs.
If you know someone who is also curious about the principle of progression, it would be a great idea to send them this article. You can also help us out by sharing this article on Facebook and Twitter.
Liked this post? You can read more on the house and home insurance-related topics that can also be useful to you. Make sure to check out these other great content:
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Let us know in the comments if you have learned something new today. Feel free to share any other valuable information regarding the principle of progression not mentioned in this post.