National Real Estate Exam (PSI)Valuation and Market AnalysisMedium
A homeowner is considering selling their property, which is located next to a newly approved municipal landfill. The presence of the landfill is expected to negatively impact property values in the immediate vicinity. This situation best illustrates which principle of value?
- APrinciple of Externalities
- BPrinciple of Conformity
- CPrinciple of Contribution
- DPrinciple of Regression
Show answer & explanationAnswer & explanation
Correct answer: A. Principle of Externalities
The principle of externalities states that factors outside the property's boundaries can have a positive or negative impact on its value. A nearby landfill is a clear external factor that would negatively affect property value.
Why the other options are wrong
- B. Conformity suggests that maximum value is realized when properties are similar in an area, which isn't directly addressed by the landfill's impact.
- C. Contribution relates to the value an improvement adds to the property, not external factors.
- D. Regression is about a superior property being negatively affected by inferior properties in its neighborhood, which is a specific type of external influence, but 'externalities' is a broader and more direct fit for the landfill scenario.
Principle of Externalities
The principle of externalities states that property values are affected by external factors, both positive (e.g., a new park) and negative (e.g., a nearby landfill, crime rates) that are outside the property itself.
- Value is influenced by factors beyond the property's boundaries.
- Can result in an increase (positive externality) or decrease (negative externality) in value.
- Appraisers must consider these external influences during valuation.
Memory trick: External factors, good or bad, shape the property's worth, beyond its own bounds.