California Real Estate Broker ExaminationValuation and AppraisalHard
A residential property was recently built with extremely high-end, custom features that are significantly more luxurious than typical homes in the neighborhood. An appraiser conducting a valuation finds that these features do not add as much value as their cost because the market of potential buyers for such extravagance in this location is very limited. This situation best illustrates the principle of:
- APrinciple of Regression
- BPrinciple of Increasing and Decreasing Returns
- CPrinciple of Contribution
- DPrinciple of Supply and Demand
Show answer & explanationAnswer & explanation
Correct answer: C. 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 overall value of the property, not by its cost. In this case, the expensive features contribute less to the total value than their cost.
Why the other options are wrong
- A. Principle of Regression states that the value of a superior property is adversely affected by the presence of an inferior property in the same area.
- B. Principle of Increasing and Decreasing Returns states that adding improvements increases value up to a certain point, after which additional improvements no longer add proportional value. While related, 'Contribution' specifically addresses the value of a component.
- D. Principle of Supply and Demand relates to the availability of properties versus buyer desire, not the value of individual features.
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 overall value of the property, not by its cost to install.
- Value is determined by market perception, not just cost.
- Applies to additions, renovations, and upgrades.
- Helps avoid over-improving a property for its market.
Memory trick: Contribution: Does it ADD value, not just cost?