The Going Value of Real Estate

Abstract

T HE term value of real estate today has almost as many meanings as there are points of view regarding real estate. To a professional expert witness, it may mean any sum which the man who retains him wants it to mean. To the speculative dealer, it means the sum he can afford to pay for a piece of real estate and still be reasonably sure of making a profit on its resale tomorrow, next week, or next year. To some dealers in guaranteed first mortage bonds, it means apparently the cost of the land, plus the cost of erecting a building, plus the cost of commissions to bond salesmen and the profits of the promoters. To certain more conservative dealers in mortgages, it means the present net income capitalized at a suitable rate per cent, this rate varying from four to fifteen, depending on the location of the real estate and the uses to which it is, or can be, put. To certain life insurance companies, it meant for a time, when applied to farms, the average annual gross income for a term of years capitalized in such a manner that the deduction of income sufficient to support and amortize the loan would leave a residue large enough for all operating costs, including a comfortable living for the owner. Judging by the researches of the Department of Agriculture, going value seems to have meant, consciously or unconsciously to the farmers of the middle west during the decades preceding the World War, the capitalization of current net income at the current interest rate, plus the anticipated annual increases in future incomes discounted at the same rate. To some economists, it means simply the discounted sum of all anticipated future rents. To persons having annual incomes far in excess of their needs, even for an extravagant scale of living, both tangible income from real estate and its market value, present or future, may disappear as factors in the determination of going value; and the satisfaction of a desire for social prestige, for the enjoyment of a particular view, or for an exotic existence amid romantic or unusual surroundings, may become the dominant factor in the evaluation of real estate which makes possible the gratification of those desires. Divergent as these definitions are, they have certain characteristics in common. All of them have a purpose which they are designed to serve. Intelligently used, they all have a pragmatic value. In other words, they are true because--and when-they work in the situations to which they are applied. Under certain circumstances, furthermore, the purely speculative and meretricious definitions will tend to atrophy; the application of the more basic definitions will tend to produce identical appraisals. In an economic situation, for example, which has been reasonably stable for an extended period, the capitalized sum of present rentals, the discounted sum of all anticipated future rentals, and the current market value will tend to draw so closely together that the speculators and charlatans will have no field in which to operate.