A pool cost $25,000 to build, but market data show it adds $10,000 to the home’s value. Under the principle of contribution, what is the pool worth to the property?
Correct Answer
A) $10,000
The principle of contribution measures a component by what it adds to the whole property’s value, not by its cost. Here that is $10,000, even though it cost $25,000 to build.
Why This Is the Correct Answer
Option A is correct because, under the principle of contribution, the pool's value is the $10,000 that market data show it adds to the home. Its $25,000 construction cost is not the measure of its contribution.
Why the Other Options Are Wrong
Option B: $25,000
Option B, $25,000, is wrong because it uses the pool's construction cost. Contribution is measured by the value the pool adds, which is $10,000.
Option C: $15,000
Option C, $15,000, is wrong because it subtracts the contribution from the cost ($25,000 - $10,000 = $15,000). That difference is the cost not recovered, not the pool's contribution, which is $10,000.
Option D: $35,000
Option D, $35,000, is wrong because it adds cost and contribution ($25,000 + $10,000 = $35,000). Adding the two has no meaning; the pool's contribution is $10,000.
Value added, not money spent
Ask what a buyer would pay extra for the feature, not what the owner paid to build it.
How to use: Use this when a question gives both a cost and a market-supported value added for a feature.
Exam Tip
When a question gives both cost and market contribution, the contribution figure answers a principle of contribution question.
Common Mistakes to Avoid
- -Using construction cost as the feature's value
- -Subtracting contribution from cost and calling it value
- -Adding cost and contribution together
Concept Deep Dive
Analysis
This question tests the principle of contribution. A component is worth what it adds to the value of the whole property, not what it cost to build. The market shows the pool adds $10,000, so that is its value to the property.
Background Knowledge
The principle of contribution holds that the value of a component equals what it adds to the whole, or what its absence would subtract. Cost and value often differ, especially for features buyers value less than they cost to install.
Real-World Application
A homeowner tells the appraiser her new pool cost $25,000. Paired sales in the neighborhood show homes with pools sell for about $10,000 more, so the appraiser adjusts for the pool at $10,000.
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