Most humans have a strong desire to be unique, but when it comes to real estate, it’s a bit different. In real estate, it’s best not to stand out from the crowd and conform to industry or neighborhood trends. This valuation and appraisal concept is called the Principle of Conformity.
What Is the Principle of Conformity?
The principle of conformity states that the value of a property is maximized when it complies with the design and features of the surrounding area.
This means as long as a property is similar to other properties in the neighborhood (condition, age, and size), it is more likely to appeal to potential buyers and thus increase its respective value. It’s worth noting if a house does not adhere to the same style and design as neighboring properties, it can cause depreciation or a decrease in value.
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?
An example of the principle of conformity would be if you had a two-car garage in a neighborhood filled with properties with one-car garages. An increase would occur if your property was placed in a neighborhood with other two-car garages.
Obviously, most properties you cannot pick up and move, but appraisers use this principle to determine value for properties that are not in line with each other.
Other causes of the conformity principle include: bedroom sizes, amount of bedrooms, bathrooms, pools, yard sizes, trees, home sizes, age, income, location, and more.
The Principle Conformity in Commercial Real Estate
The Principle of Conformity is also fundamental in commercial real estate. Ideally, stores in a specific area should appeal to the same type of people. For example, Target, Kay Jewelers, and Starbucks should theoretically do better in an upper-class neighborhood than a Dollar General. Knowing this, as a real estate investor, you’re better off opening a discount store like Dollar General elsewhere.
To take this concept a step further, think about your local mall. There’s a reason a food court exists; it puts all the similar food stores together in a pleasant customer-friendly manner. Customers can buy a taco from one place and purchase a sweet roll from another. Food courts exist to satisfy a consumer’s demand. It would be inconvenient if you went to buy food and the closest vending drink machine was on the other side of the mall.
Functional Obsolescence and the Principle of Conformity
Functional obsolescence and the principle of conformity go hand and hand. Functional obsolescence is a form of depreciation; this term refers to the loss of property value due to an obsolete design feature. The conformity principle can cause functional obsolescence and depreciation. While the terms are not precisely the same, they do often go hand in hand.
Principle of Conformity Limitations
It’s worth noting the principle of conformity theoretically works most of the time but has its limitations. For example, if you opened a Dollar General next to four other discount stores, it may be tougher to succeed than dealing with just two.
The same goes for homes that may look all the same. If you’re trying to sell your house, and every home looks exactly the same, it may be harder for you to sell your house. Yes, it’s nice that each house has the same amount of car garages, but adding some unique features can help your property sell, especially in a competitive neighborhood.
What to Know for the Real Estate Exam
When exam day comes, you need to be familiar with the principle of conformity; remember, the principle of conformity states that the value of a property is maximized when it complies with the design and features of the surrounding area. Understand how the principle of conformity applies to real estate valuation and commercial real estate, and you’ll be good to go come exam day.