National Real Estate Exam (PSI)Valuation and Market AnalysisHard
A homeowner installs a luxurious, custom-built swimming pool in their backyard, spending $100,000. Similar homes in the neighborhood without pools typically sell for $400,000, while similar homes with standard pools sell for $420,000. After the installation, the appraiser estimates the home's value increased by only $15,000 due to the pool. This scenario best illustrates which principle of value?
- APrinciple of Conformity
- BPrinciple of Progression
- CPrinciple of Supply and Demand
- DPrinciple of Contribution
Show answer & explanationAnswer & explanation
Correct answer: D. Principle of Contribution
The Principle of Contribution states that the value of an improvement is measured by what it adds to the total value of the property, not by its cost. In this case, the $100,000 pool only contributed $15,000 to the property's market value, illustrating this principle.
Why the other options are wrong
- A. Conformity suggests that maximum value is realized when a property conforms to the characteristics of the neighborhood, which is related but not the direct principle at play regarding the specific value added by the pool.
- B. Progression states that a lower-valued property gains value by being in a neighborhood of higher-valued properties; this scenario describes a specific improvement's impact on its own property's value.
- C. Supply and Demand relates to market forces affecting price, not specifically the value added by an individual improvement.
Principle of Contribution
The value of any component of a property is measured by what it adds to the overall value of the whole property, not by its cost to install.
- Applies to additions, renovations, and features.
- An improvement's cost does not equal its value contribution.
- Value contributed is often less than cost, especially for over-improvements.
- Crucial for evaluating ROI on property enhancements.
Memory trick: Value is not just cost, it's what the market will CONTRIBUTE.