National Real Estate Exam (PSI)Valuation and Market AnalysisMedium
A buyer is interested in purchasing a property that is significantly larger and more luxurious than other homes in the immediate neighborhood. An appraiser conducting a valuation for this property would likely apply which principle of value due to the surrounding, less valuable homes?
- APrinciple of Supply and Demand
- BPrinciple of Regression
- CPrinciple of Progression
- DPrinciple of Conformity
Show answer & explanationAnswer & explanation
Correct answer: B. Principle of Regression
The principle of regression states that the value of a superior property will be adversely affected by the presence of surrounding, lesser-valued properties. This scenario describes a 'mansion in a modest neighborhood,' where the larger, more luxurious home's value is pulled down by the inferior homes around it.
Why the other options are wrong
- A. Supply and demand is a general economic principle, not the specific effect described here.
- C. Progression is the opposite; a lower-valued property's value is increased by higher-valued neighbors.
- D. While related to neighborhood characteristics, conformity suggests maximum value when properties are similar, and regression is the specific application when a property deviates significantly on the superior side.
Principle of Regression
The principle of regression states that a higher-valued property will tend to decrease in value if it is located among properties of lesser value. The inferior properties 'pull down' the value of the superior property.
- Often seen as the 'mansion in a modest neighborhood' effect.
- One of the social forces influencing real estate value.
- The opposite principle is progression.
Memory trick: Superior house among the lesser, its value regresses, less impressive.