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Diminishing Returns

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Cowgirl

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Jan 22, 2003
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Certified Residential Appraiser
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Texas
What is the accurate definician of "The Principle of Diminishing Returns"? I have heard different versions.

Thank You[/img]
 

TC

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Certified Residential Appraiser
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Pennsylvania
in economics, law stating that if one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point. Thus, for example, if more and more laborers are added to harvest a wheat field, at some point each additional laborer will add relatively less output than his predecessor did, simply because he has less and less of the fixed amount of land to work with. The principle, first thought to apply only to agriculture, was later accepted as an economic law underlying all productive enterprise. The point at which the law begins to operate is difficult to ascertain, as it varies with improved production technique and other factors. Anticipated by Anne Robert Jacques Turgot and implied by Thomas Malthus in his Essay on the Principle of Population (1798), the law first came under examination during the discussions in England on free trade and the corn laws. It is also called the law of decreasing returns and the law of variable proportions.

in the Appraisal Game: if you hire 1 person and your productivity goes up along with your income, good deal. But if you continue to add people and the income does not increase at the same rate as when adding the first employee--the returns are increasing, but at a diminishing rate.
Moral of the story: work for yourself! :wink:

TC
 

Don Clark

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Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
In plain language it is the concept that the more you add to an existing property, the less you get in return. Just one example. If you add a room to a house, that may gain a considerable return by way of additional square footage and utility. But, with each additional item you add, the less return you get until, at some point, if you add more, not only will you get less in return, but in fact may cause a loss in overall value due to overimprovement. To quote from "Fundamentals of Real Estate Appraisal, written by Martha Williams & William Ventolo, Jr.................."Improvements to land and structures will eventually reach a point at which they will have no positive effect on property values. As long as money spent on such improvements produce a proportionate or greater increase in income or value, the law of increasing returns is in effect. At the point when additional improvements bring no corresponding increase in income or value, the law of decreasing returns is operating." You should also look at the principle of contribution in assessing this, as well as the principle of conformity, progression and regression.

Don Clark
 

TC

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Don,

I think the law pertains more to the labor and production side of economics.

TC
 

Cowgirl

Sophomore Member
Joined
Jan 22, 2003
Professional Status
Certified Residential Appraiser
State
Texas
Thank You, gentleman.

The quote from FREA may be a good one for Jeff to use in his brochure.

My situation was Comp 1 was most near the subject with a larger negative site adjustment based on the market value difference in the sites of the comparables and the subject. Simply that addition was getting a higher lot premium than the other additions. These are .50 to 2.0 acre subdivision lots.

The client claims that adjustment does not follow the principel of diminishing returns. I guess I am still confused on how that principal applies to this situation or if it does at all.

Must say again the site is a God Sent.

Thank You.
 

Mike McBeth

Freshman Member
Joined
Jan 26, 2003
Professional Status
Certified Residential Appraiser
State
Oregon
it sounds like you are making location adjustment in the site adjustment.
To me, if your dealing in land, your talking about excess or surplus of land.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
The rule of diminishing returns is more apparent in Government. They add more and more employees which do nothing but generate paper. This also is present in many businesses where the employees do more to justify their existance than actually perform work.

Roger
 

Mike Simpson

Senior Member
Joined
Jan 30, 2002
When an AMC sub contracts labor to companies in India.

When a lender expects to pay $40-$50 for a desk top appraisal.

When a lender charges $350 for "an appraisal" when all they did was utilize an AVM for $50 and stick the other $300 in their pocket (BOY...the clients gonna be peeved Wally!).

When a sweat shop pays unlicensed help $67.50 for a field review.

When Wells Fargo rips off their clients to such an extent their license is pulled in California.

I could go on & on--SORRY--everyone else nailed the answer to your question...so I thought I'd offer a different view point...hope you don't mind.

-Mike
 

Paul Ness MAI

Member
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Jan 14, 2002
Professional Status
Certified General Appraiser
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Pennsylvania
It is a universal law that can be applied to any of the agents of production, not just labor. The concept applies to real estate in a number of ways, as real estate development is meant to create value, much as is the growing and harvesting of crops or the manufacture of widgets, requiring the optimal combination of the agents of production.

The Appraisal of Real Estate identifies the principle of balance as one of the fundamentals of appraisal. This principle holds that "real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibruim." Economic balance is achieved when the combination of land and improvements is optimal, i.e. when there is no marginal benefit or utility achieved by adding another unit of capital. It is at the "point of diminishing returns" that maximum value is achieved. Further, The Dictionary of Real Estate Appraisal defines "diminishing utility" as "the concept that the consumption of each succeeding unit of economic good yields less satisfaction than the preceding unit." This is the basis for functional and economic obsolescence.
 

George W Dodd

Senior Member
Joined
Jul 9, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
Can The Principle of Diminishing Returns continue to a point where they become negative? 8O
 
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