A seller adds a $95,000 kitchen and asks $420,000. Verified market evidence shows equally desirable substitute homes, considering location and features, available for $390,000 without undue delay. Which principle explains why the asking price may not be supported?
Correct Answer
B) Substitution, via cheaper equivalent homes nearby
Under the stated substitute evidence, a buyer can acquire equal utility for less than the asking price. The $95,000 kitchen cost is not automatically its value contribution. This illustrates substitution, not a guaranteed neighborhood-wide discount or a specific lot/building ratio.
Why This Is the Correct Answer
Option B is correct because the principle of substitution states that the upper limit of value tends to be set by the cost of acquiring an equally desirable substitute. Here, buyers can get equal utility in comparable homes for $390,000, so the $420,000 asking price may not be supported. The $95,000 spent on the kitchen does not by itself add that amount to value.
Why the Other Options Are Wrong
Option A: Anticipation, since buyers expect modern kitchens
Option A is wrong because anticipation concerns value based on expected future benefits, not buyers choosing a cheaper equivalent home available today. Buyers expecting modern kitchens does not explain why the $420,000 asking price is unsupported.
Option C: Change, as the neighborhood evolves
Option C is wrong because the principle of change describes how neighborhoods and markets evolve over time. The facts describe cheaper equivalent homes available now, not neighborhood change.
Option D: Balance, from the lot-to-building ratio
Option D is wrong because balance concerns the proportion of agents of production or land uses, and nothing in the facts involves a lot-to-building ratio. The gap between $420,000 and $390,000 comes from substitute homes, not balance.
Why pay more for same?
A buyer will not pay more for a home when an equally good one is available for less without undue delay.
How to use: Use this when a question compares an asking price with cheaper equivalent alternatives.
Exam Tip
When the facts mention equally desirable alternatives at a lower price, look for substitution.
Common Mistakes to Avoid
- -Treating the cost of an improvement as its value contribution
- -Confusing substitution with anticipation
- -Assuming an asking price reflects market value
Concept Deep Dive
Analysis
This question tests recognition of the principle of substitution. When equally desirable substitute homes are available for $390,000 without undue delay, a buyer has little reason to pay $420,000. The $95,000 kitchen cost does not change that, because cost is not the same as value contribution.
Background Knowledge
Substitution is the basis of all three approaches to value: buyers will not pay more than the cost of an equally desirable substitute, whether bought or built. It also explains why an improvement's cost can exceed its contribution to value. Overimprovement relative to the market is a common example.
Real-World Application
A homeowner spends heavily on a luxury kitchen and expects a sale price well above nearby homes. The appraiser finds several similar homes with good kitchens selling for less and concludes that market value is limited by those substitutes.
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