A builder spent $310,000 on land, labor and materials to produce a house, which later sold for $295,000. The $310,000 figure is best described as the house's:
Correct Answer
B) Cost
Cost refers to production, not exchange: it is the expenditure required to produce a property. The $310,000 the builder spent is cost. The $295,000 paid by the buyer is the price, and neither figure is by itself market value or the value to a particular investor.
Why This Is the Correct Answer
Option B is correct because cost is the expenditure required to produce property, such as building a house. The builder's $310,000 outlay on land, labor and materials is a production figure, which is cost.
Why the Other Options Are Wrong
Option A: Price
Option A, price, is the amount actually paid in a particular transaction. Here the price is the $295,000 the buyer paid, not the $310,000 the builder spent.
Option C: Market value
Option C, market value, is the most probable price in a competitive and open market. The builder's outlay measures production spending and says nothing by itself about what the market would pay, as the lower $295,000 sale shows.
Option D: Investment value
Option D, investment value, is the value of a property to a particular investor. The builder's spending is a production figure, not an opinion of the property's worth to a specific investor.
Build cost, buy price
You build at cost and buy at price. Value is the appraiser's opinion of what it is worth.
How to use: Use this to label any dollar figure in a question as cost, price or value before answering.
Exam Tip
Ask whether a figure came from producing the property, from a sale, or from an opinion; that tells you whether it is cost, price or value.
Common Mistakes to Avoid
- -Treating construction cost as proof of market value
- -Using price and cost as interchangeable terms
Concept Deep Dive
Analysis
This question tests the difference between price, cost and value. The $310,000 was spent to produce the house, so it is a production figure. The sale amount is the price, and value is an opinion that neither figure establishes on its own.
Background Knowledge
Appraisers keep price, cost and value apart. Price is a historical fact from one transaction, cost is the expenditure to produce a property, and value is an opinion of worth under a stated definition. Cost can differ from both price and value, as when a house costs more to build than the market will pay.
Real-World Application
A developer tells an appraiser a new home must be worth at least what it cost to build. The appraiser explains that cost is a production figure and that market value comes from what buyers pay for similar homes.
More Market Questions
In market area analysis, what characteristic distinguishes a district from a neighborhood?
Under USPAP Standards Rule 1-3(a), which item must an appraiser identify and analyze when necessary for credible results in a market value assignment?
How does the Fannie Mae Selling Guide define a neighborhood?
Several homes in a neighborhood are vacant and boarded up. Which market force does Fannie Mae classify this as?
Infrastructure investment such as a new interchange typically affects nearby land by:
A city raises property tax rates and tightens building regulations. Which market force does Fannie Mae classify these as?
An appraiser believes, without market evidence, that a nearby group home lowers values. What does Fannie Mae require?
Which three categories are used to report the supply of properties in a Fannie Mae neighborhood section?
An appraiser is asked for a retrospective value opinion as of three years ago. When must the appraiser meet the Competency Rule?
Can mixed land uses in a residential neighborhood ever enhance home values, according to Fannie Mae?
People Also Study
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam