Florida Real Estate Broker ExaminationValuation and Market AnalysisHard
A commercial property owner is considering adding a new, state-of-the-art security system to their office building. The system costs $50,000 to install. An appraisal indicates that while the system is advanced, it will only increase the property's market value by $30,000 because most tenants do not perceive the full value of such an advanced system. Which appraisal principle best explains this valuation outcome?
- APrinciple of Conformity
- BPrinciple of Contribution
- CPrinciple of Progression
- DPrinciple of Supply and Demand
Show answer & explanationAnswer & explanation
Correct answer: B. Principle of Contribution
The Principle of Contribution states that the value of an improvement is not measured by its cost, but by what it adds to the property's total value. In this case, the $50,000 security system only contributes $30,000 to the property's market value.
Why the other options are wrong
- A. Conformity relates to a property's similarity to others in its area, not the value of an individual feature.
- C. Progression refers to a lower-valued property gaining value from surrounding higher-valued properties.
- D. Supply and Demand relates to market forces, not the value of a specific improvement.
Principle of Contribution
The value of any component of a property is measured by how much it adds to the overall value of the property, not by its cost.
- Cost does not always equal value.
- Improvements should be weighed against their potential increase in market value.
- Crucial for determining the economic feasibility of renovations or additions.
Memory trick: Contributions Add Up (or Down) to Value!