California Real Estate Broker ExaminationValuation and AppraisalHard
A buyer is interested in a property that is located next to a newly proposed high-speed rail line. Although the rail line is not yet built, the potential for increased noise and decreased privacy is already affecting property values in the area. This decline in value is best explained by the principle of:
- AConformity
- BAnticipation
- CSubstitution
- DContribution
Show answer & explanationAnswer & explanation
Correct answer: B. Anticipation
The Principle of Anticipation states that value is created by the expectation of future benefits or detriments. In this case, the anticipation of future noise and decreased privacy from the high-speed rail line is causing a present decline in property values, even before the rail line is operational.
Why the other options are wrong
- A. Conformity states that value is maximized when properties are similar in design and use, not applicable here.
- C. Substitution states that a buyer will pay no more for a property than the cost of an equally desirable substitute, not directly applicable to future external detriments.
- D. Contribution relates to the value added by individual property components, not external future events.
Principle of Anticipation
The Principle of Anticipation states that value is created by the expectation of future benefits or detriments. It holds that people buy income-producing property for the future income stream or residential property for future amenities and capital appreciation.
- Value is influenced by expected future events, not just past or present.
- Applies to both positive (e.g., future income, appreciation) and negative (e.g., future noise, pollution) expectations.
- Underpins the income approach to valuation.
Memory trick: C-A-S-C-O: Conformity, Anticipation, Substitution, Contribution, Obsolescence.