Economic and Physical Characteristics of Real Estate
Real estate possesses seven basic characteristics that define its nature and affect its use. These characteristics fall into two general categories: Economic and Physical.
Economic Characteristics of Real Estate
The four economic characteristics of land that affect its value as a product in the marketplace are scarcity, improvements, permanence of investment, and area preference.
Scarcity
We usually do not consider land a rare commodity, but only about a quarter of the earth’s surface is dry land; the rest is water. The total supply of land, then, is not limitless. While a considerable amount of land has not been developed, the supply in a given location that is suitable for a particular use is finite. There is also value in leaving land in its natural condition to preserve species that might otherwise be extinguished, as well as to benefit the earth’s environment overall.
Improvements
Building an improvement on one parcel of land can affect the land’s value and use, as well as that of neighboring tracts and whole communities. For example, constructing a new shopping center or selecting a site for a nuclear power plant or toxic waste dump can dramatically change the value of land in a large area.
Permanence of Investment
The capital and labor used to building an improvement represent a large fixed investment. Although even a well-built structure can be razed to make way for a newer building, improvements such as drainage, electricity, water, and sewerage remain. The return on such investments tend to be long term and relatively stable.
Area Preference
Also known as situs (“place”), area preference is commonly referred to as “location, location, location.” This economic characteristic refers not only to geography but also to the preference for a specific area. Area preference is based on several factors, such as convenience, reputation, and history. It is the unique quality of these preferences that results in the different price points for similar properties. Location is often considered the single most important economic characteristic of land.
Physical Characteristics of Land
Land has three physical characteristics: immobility, indestructibility, and uniqueness.
Immobility
It is true that some of the substances of land are removable and that topography can be changed, but the geographic location of any given parcel of land can never be changed. It is fixed and therefore immobile.
Indestructibility
Land is considered indestructible, even though it is subject to both natural and human forces. Land can be denuded of vegetation by strip mining, paved over for a highway or building, or eroded by a flood or dust storm. The geographic location will still remain, whatever its condition. This permanence of land, coupled with the long-term nature of most improvements, tends to stabilize investments in real property.
The fact that land is indestructible does not, however, change the fact that the improvements on land depreciate and can become obsolete, which may dramatically reduce the land’s value. This gradual depreciation should not be confused with the knowledge that the economic desirability of a given location can change.
Uniqueness
Uniqueness, which is also known as nonhomogeneity, is the concept that no two parcels of property are exactly the same or in the same location. The characteristics of each property, no matter how small, differ from those of every other, and each property has its own geographic coordinates. An individual parcel has no substitute because each is unique.
Question
Which of the following is NOT an economic characteristic of land?
A. ability to be improved
B. Location
C. Scarcity
D. Immobility
Not sure about the answer? Watch this video for the explanation.
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