There have been huge shifts in the real estate industry in the last few years.  While the market have seen a dramatic downturn, and interest rates have tumbled, sellers and buyers are asking themselves what it all means, especially when it comes to property values.  The topic of "appreciation" is one of particular interest, and I'm not talking about a broker buying you a hand-held vacuum as a gift for purchasing a home from them.  Appreciation is the increase of value to a property for various reasons that can include relative value to surrounding properties, construction and improvements, or any other factor that affects the value positively.

 While it may seem like a cut-and-dry topic, appreciation is actually a clouded subject and can be confusing.  It gets even more confusing when you consider the following claim: properties do not appreciate in value.  Are you confused yet?  Well, let me explain.

Flourishing real estate markets abound, and these markets have a plethora of eager investors.  Some of these same investors are confused and thwarted in making an investment despite the favorable conditions they may have stumbled upon.  And yet, others are finding more opportunities than they could have ever imagined, and are enjoying much growth. 

One common trait found in those that are faltering in making the most of investment opportunities is the lack of knowledge around appreciation.  It needs to be stated here that appreciation is more attributable to the actual land, not the house on the land.  To put it in perspective, would you rather have a lack-luster home in a good neighborhood, close to good schools and other necessities, or would you rather have a mansion in a neighborhood that has high rates of vacancy and crime, and is far from those amenities you most value?  Land and its attributes are what make an investment attractive, not necessarily the quality of the construction on the land. 

One example of how the land plays a larger role in appreciation can be seen two scenarios, each with unique houses on them.  For this example, imagine two houses on their respective lots, one valued at $300,000 and the other $200,000.  The neighborhood in which these houses are located has seen much growth in commercial activity, added office space, and lower vacancy rates.  Because these factors are playing into the market as whole, in essence affecting every property in the area, every piece of property sees a proportioned increase.  In our example, both properties would have seen an increase of, say, 15%.  In both cases, there were no improvements, additions, or major changes to the homes that would have caused it to be perceived as better to home shoppers.  The difference came in the improvements around the properties. 

You can deduct from this example that the land increased in value, not the homes situated on the land. 

This basic understanding should revolutionize most real estate investors' strategy in buying a property.  It may cause some who were once unwilling to look at a fixer-upper in a good neighborhood, to be more willing to take on the task.  Moreover, if a house sits adjacent to an open lot, Eureka!  It's like finding an untapped gold mine!

Once again, it's all in how you perceive an opportunity.  This new view of land and the construction on it can keep you from seeing merely the work needed to rehab a home, and would allow you to see the value of the surrounding community.  As mentioned before, this new view would cause you to prize an empty lot instead of pass over it.

Supply and demand are the basic economic tenets behind the assertion made in this article: that appreciation of property is attributable to the land, not the condition of the construction on the land.  Case in point, those areas of the country with the highest property values are in densely populated areas with many residential dwellings and commercial activity.  As the demographic population soars, the availability of land in desirable places becomes scarce.  There can be found much value in a home or property that does not occupy very much space, all because it occupies any land at all!  This would also make paying market value for a home sensible, as it relates to you having access to a piece of land than can be valued at much more than the hose you purchased.

Considering a small home in a much sought-after area should be within every investor's sights.  It should not matter how small or run-down the construction is, but rather the potential for uses other than housing.  Even if the house remained on the property and was only marginally improved, it is the land which will make up the greater part of increased valuation.

This understanding of land valuation can be enlightening, and can completely twist the strategy behind real estate investments.  Apply it, and see how much your world changes.