An appraiser finds that homes with swimming pools sell for $15,000 more than comparable homes without pools. However, the cost to install a pool is $25,000. This illustrates the principle of:
Correct Answer
A) Contribution
Contribution concerns a component’s effect on the whole property’s value under the relevant market conditions. Here the supported $15,000 pool contribution differs from its $25,000 installation cost. That difference alone does not establish that the property is over-improved; appropriateness to its competitive market and other evidence must be assessed.
Why This Is the Correct Answer
Option A is correct because the principle of contribution holds that a component is worth what it adds to the value of the whole property. Here the pool contributes $15,000 based on market evidence, even though it costs $25,000 to install.
Why the Other Options Are Wrong
Option B: Conformity
Option B, conformity, concerns how compatibility with surrounding properties supports value. The scenario is about a single component's value compared with its cost, which is contribution.
Option C: Substitution
Option C, substitution, explains that buyers will pay no more than the cost of an equally useful alternative. It does not directly describe why a pool adds less value than its installation cost.
Option D: Anticipation
Option D, anticipation, holds that value reflects expected future benefits. The scenario compares a component's current market contribution with its cost, which is the principle of contribution.
Value added, not money spent
Contribution asks what the feature adds to the price, not what it cost to build. Spending $25,000 does not mean adding $25,000.
How to use: Use this when a question contrasts a feature's cost with its market effect.
Exam Tip
When a stem compares market value added by a feature to its cost, think contribution.
Common Mistakes to Avoid
- -Equating a feature's installation cost with its value
- -Confusing contribution with conformity
- -Concluding over-improvement from the cost gap alone
Concept Deep Dive
Analysis
This question tests recognizing the principle of contribution. The market adds $15,000 for a pool that costs $25,000 to install. The gap shows that a component's value is measured by what it adds to the whole, not by its cost.
Background Knowledge
The principle of contribution applies the principle of balance to property components. A feature's value equals its effect on the whole property's market value, which may be more or less than its cost. A gap between cost and contribution alone does not prove the property is over-improved; market appropriateness must be assessed.
Real-World Application
A homeowner spends $25,000 on an in-ground pool and expects the home's value to rise by the same amount. The appraiser's paired sales show pools add about $15,000 in that market, so the adjustment reflects $15,000.
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