A market area contains $400K starter homes and one $1.2M custom estate. What appraisal problem does the estate face?
Correct Answer
C) It may suffer from regression as an over-improvement
Under the principle of regression, a much more expensive property among lower-priced homes may be worth less than it would be among similar homes. Progression is the opposite effect, which benefits the lesser homes. The appraiser should test the effect with market evidence, possibly comparables from a wider competitive area.
Why This Is the Correct Answer
Option C is correct because, under regression, a much more expensive property among lower-priced homes may be worth less than it would be among similar homes. The estate is an over-improvement for its market area. The appraiser should measure the effect with market evidence, possibly using comparables from a wider competitive area.
Why the Other Options Are Wrong
Option A: It gains value from the lower-priced homes (progression)
Option A says the estate gains value from the lower-priced homes through progression. Progression benefits the lesser homes near superior ones, not the superior property, so this reverses the principle.
Option B: Its price sets a ceiling for the nearby starter homes
Option B says the estate's price sets a ceiling for the nearby starter homes. The estate does not cap starter-home values; if anything, the lesser homes may benefit slightly from progression, while the estate faces the downward pressure.
Option D: It cannot be appraised in this location
Option D says the estate cannot be appraised in this location. It can be appraised; the appraiser may need a wider search for comparables and must account for the regression effect.
Big House, Pulled Down
The biggest house on the block gets pulled down by its smaller neighbors; that downward pull is regression.
How to use: Use this image to identify regression when a stem describes one superior property among lesser ones.
Exam Tip
When a stem features one expensive property among much cheaper ones, look for regression or over-improvement in the answer.
Common Mistakes to Avoid
- -Applying progression to the superior property
- -Assuming cost to build equals market value for an over-improvement
- -Concluding a property cannot be appraised when local comparables are scarce
Concept Deep Dive
Analysis
This question applies the principle of regression to an over-improved property. A $1.2 million custom estate among $400,000 starter homes is the superior property, and its value may be lower than it would be among similar homes. The appraiser should test that effect with market evidence.
Background Knowledge
Regression and progression describe how dissimilar properties affect each other's values. An over-improvement is a property whose size, quality or cost exceeds what is typical for its market area, and buyers often will not pay full cost for it there. Appraisers support any such effect with market data rather than assume its size.
Real-World Application
An appraiser values a $1.2 million estate in a subdivision of $400,000 homes. Finding no similar sales nearby, the appraiser expands the search to a wider competitive area and analyzes how location among lesser homes affects buyers' willingness to pay.
More Market Questions
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