Florida Real Estate Broker ExaminationValuation and Market AnalysisMedium
A homeowner is considering replacing their outdated kitchen, which is 30 years old. An appraiser estimates that a full kitchen renovation costing $50,000 would only add $35,000 to the property's market value. This situation is best described by which appraisal principle?
- APrinciple of Progression
- BPrinciple of External Obsolescence
- CPrinciple of Substitution
- DPrinciple of Contribution
Show answer & explanationAnswer & explanation
Correct answer: D. Principle of Contribution
The Principle of Contribution states that the value of any component of a property is measured by how much it adds to the total value of the property, not by its cost. In this case, the kitchen renovation's contribution to value ($35,000) is less than its cost ($50,000).
Why the other options are wrong
- A. Progression relates to a property's value being increased by surrounding superior properties.
- B. External obsolescence is a loss in value due to factors outside the property itself.
- C. Substitution states that a buyer will pay no more for a property than the cost of acquiring an equally desirable substitute property.
Principle of Contribution
The value of any component of a property is measured by the amount it adds to the total value of the property, not by its cost.
- Improvements are only worthwhile if they add more to value than they cost.
- Helps homeowners decide on renovation projects.
- Often explains why some renovations have a low return on investment.
Memory trick: Contribution: What does an addition contribute to the total value?