Real Estate Investments and How to Profit on Property and Land

The use to which land is put determines its value.given time.
Suppose that three persons are eager to acquire theValue, Price and Cost
same parcel of land and that each makes an offer toThe economist Adam Smith referred to value as
the landowner. To whom will the owner sell?exchange value to indicate that true market value is
Normally, he or she sells to the one who offers thedetermined by the ability of any item to command
most dollars.other goods or services in exchange. It is not price
The use each of the three persons intends for theand it is not cost. A seller can arbitrarily attach a price
land determines the value of that tract to each ofof $100,000 to vacant lot where neighboring lots are
the three prospective buyers. Suppose the use theselling for $8,000, but the lot does not have the
first one has in mind will produce a net income ofability to command that number of dollars in
$600,000 per annum. Another has a use in mind thatexchange. So, price and exchange value are not the
will net $800,000 per annum after expenses. Thesesame. We could set a price in terms of gold, silver,
are typical returns on beach front houses in Jamaica.steak or bread, money is merely a medium of
The third has decided to use the property in such aexchange and has little value if not regarded in that
way that it will provide $1,200, 000 per annum afterlight.
expenses. Which one could afford to bid the highestJust as price and exchange value are not the same,
price to the owner? The third person couldso it is that cost and exchange value are not the
theoretically bid twice the amount the first one couldsame. Ten $100 bills do not require much ink or much
afford and still make the same percentage of profitpaper to manufacture; the total cost of ink and
due to the better use intended for the property.paper alone probably would not exceed $10.00. But
This is an overly simplified reference to the concepttheir power to command goods and services far
called highest and best use. Land may have manyexceeds their cost.
highest and best uses over a long period of time, butOver-Improvements
it can logically have only one highest and best use atHowever, it is possible to pour money into a
any given time. Some authorities call it land's mostproperty than good judgment would indicate might
economically effective use, while others say it isbe recaptured. For example, if the owner of a $3
land's most profitable use, but all are really saying themillion house in a neighborhood of similar homes adds
same thing: the highest and best use of land is thea $2 million swimming pool or $3 million addition to the
legal use that produces the greatest amount overhouse, it is doubtful that the total cost will be
the longest period of time, resulting in the greatestrecaptured when the property is sold. The two
value to the land. Another fact when dealing withadditions illustrate over-improvements.
Jamaica beach property for lease, rent or for sale.An over-improvement occurs when an owner invests
Highest and best use may be defined as the legal usemore money in a structure than he or she may
that produces the greatest amount of income overreasonably expect to recapture (recover).
the longest period of time, resulting in the "greatestThese are key concepts when dealing with beach
value of land". In order to qualify, there are fourfront houses in Jamaica which along with
essential elements:o Legally permittedo Physicallycondominiums have become a popular Jamaica real
possibleo Economically Feasibleo Most profitableestate investment.
Land can have only one highest and best use at a