Real Estate License Exam: The Importance of Location - dummies

Real Estate License Exam: The Importance of Location

By John A. Yoegel

Many things ultimately affect the value of real estate and these will be important to know for the Real Estate License Exam. You’ve probably heard the classic real estate question: What are the three most important factors in determining real estate value? Answer: Location, location, location. Although not the only factor, location probably is the most important.

But what does location really mean? And why is it so important? And what about all the other factors affecting real estate value?

You can’t move real estate

The most important characteristic of real estate and the reason location is such an important factor in its valuation is the fact that real estate is immobile. Exam questions in this area usually focus on the issue of immobility being the reason location is such an important value characteristic.

Unlike personal property, you can’t move real estate. Think about this statement: It’s what makes real estate so unique and the location issue so important. Say you own a piece of real estate in a low crime neighborhood. And over time that neighborhood begins to change and becomes somewhat unsafe.

You just move the real estate, right? You can sell the real estate and move, but you can’t move the real estate itself. What’s more, because you can’t move the real estate and the environment around it has changed, the value of the real estate probably has changed, too.

The effect of the surrounding area on real estate

The fact that real estate can’t be moved makes it particularly vulnerable to the effects of the surrounding area, which can be positive, such as a piece of residential real estate located in what is perceived to be a good school district.

The influence on value can be negative if, for example, the real estate is located near a sewage treatment plant. This is the point: You’re not on an island. Unless of course you are, in which case you have a 360-degree waterfront view — so who’s better off than you?

Real estate is immobile and highly affected by its surroundings; therefore, the following is a list of some (but not all) of the environmental factors outside of the real estate itself that may affect value. And this is what is generally meant by real estate location:

  • Access to employment: Are there employment centers and therefore jobs available within a reasonable distance?

  • Amenities and services: Can you find shopping centers, libraries, restaurants, and so on?

  • Hazards and nuisances: Is the real estate too close to gas stations, waste processing plants, or other unsightly constructions?

  • Nearness to transportation: Are you near highways or public transportation?

  • Neighborhood compatibility: The surrounding land uses are similar to your real estate.

  • Safety: Make sure the crime levels are as low as possible.

  • Schools: You may want to check with neighbors about the perceived quality of the schools.

  • Traffic: Are the surrounding roadways residential or commercial streets?

Going into detail on each of these points isn’t important, but if you want to pass the exam, remember that many of these factors are relative to the particular piece of property in question. For example, most people don’t want their homes located on a heavily traveled street, but if you own a business property, then that is exactly where you want to be located.

Real estate is limited

The amount of land available is limited. That may seem obvious, but think about it in the context of a car, a chair, or anything else that can be manufactured. You can make more of those products, but you can’t make any more land. That of course doesn’t make all land valuable, but it does say something about the value of property wherever people want to be.

Most people want to live in safe neighborhoods with good schools and easy access to jobs and shopping. However, only so many of those properties are available at any point in time. Given that many people want to live in those neighborhoods, a competition ensues for those pieces of real estate and that competition raises prices.