The principle of conformity explains why a property’s fit with surrounding land uses and buildings can affect its value. It concerns compatibility, not a requirement that every building look identical.
What Is the Principle of Conformity?
The principle of conformity states that compatible land uses and reasonable architectural harmony tend to support maximum property value.
A different design does not automatically reduce value. Appraisers need market evidence to determine whether buyers see the difference as a benefit or a drawback.
The principle of conformity is one of the many appraisal principles appraisers use to determine fair market value for a home. Using the conformity principle, geographic location, comparable properties, real estate market trends, and more, appraisers can accurately determine a fair price for properties.
What Is an Example of Conformity in Real Estate?
Suppose buyers in a neighborhood usually seek modest homes with two-car garages. A much larger, more expensive house may be an over-improvement for that market. Its extra construction cost does not guarantee an equal increase in value.
The example illustrates market fit; it does not predict the value of any particular house.
Relevant features include size, layout, condition, and the compatibility of nearby land uses.
The Principle Conformity in Commercial Real Estate
For commercial property, consider whether the use fits the surrounding area. A compatible retail use is an illustration; the principle alone cannot tell you whether a particular business will succeed.
The California Department of Real Estate’s appraisal reference explains conformity as a valuation principle.
Functional Obsolescence and the Principle of Conformity
Functional obsolescence concerns value loss from a deficiency or an over-improvement. It is related to market fit, but it is not another name for conformity.
Principle of Conformity Limitations
Conformity does not establish a fixed price adjustment. Fannie Mae’s neighborhood appraisal guidance calls for objective market analysis and an explanation of over-improvements and their contributory value.
Use comparable sales and buyer demand to evaluate an unusual feature. Do not assume that similarity guarantees appreciation or that individuality guarantees depreciation.
What to Know for the Real Estate Exam
For the exam, associate conformity with compatible uses and reasonable similarity. Associate contribution with the value a feature adds to the whole property.
