An expensive custom home is built on a low-value lot in a modest neighborhood and may not sell for its full cost. Which principle does this illustrate most directly?
Correct Answer
C) Balance
The principle of balance holds that value is greatest when elements internal and external to a property are in equilibrium. An expensive home on a low-value lot in a modest neighborhood is out of balance with its surroundings and may not recover its cost.
Why This Is the Correct Answer
Option C is correct because balance holds that value is greatest when elements internal and external to a property are in equilibrium. Externally, a property should be in balance with surrounding properties, and an expensive home on a low-value lot in a modest neighborhood may not sell for its full cost of production.
Why the Other Options Are Wrong
Option A: Anticipation
Option A, anticipation, concerns value being based on expected future benefits. It does not explain why a home out of scale with its surroundings fails to recover its cost.
Option B: Substitution
Option B, substitution, says a buyer will pay no more than the cost of an equally desirable substitute. It is related to pricing generally, but the scenario most directly describes a mismatch between the property and its surroundings, which is balance.
Option D: Competition
Option D, competition, concerns excess profits attracting new competitors to a market. Nothing in the scenario involves profits drawing new entrants.
Out of balance, out of pocket
When a property is out of balance with its land or neighborhood, the owner may be out of pocket for cost the market will not pay back.
How to use: Use this phrase when a scenario describes an improvement that does not fit its site or surroundings.
Exam Tip
Look for the clue about mismatch between a property and its lot or neighborhood; that points to balance rather than broader principles like substitution.
Common Mistakes to Avoid
- -Choosing substitution because it involves cost and price
- -Confusing balance with conformity
- -Assuming cost equals value for a new custom home
Concept Deep Dive
Analysis
This question tests recognition of the principle of balance in its external sense. Value is greatest when a property is in equilibrium with its surroundings, so an expensive home in a modest area is out of balance. The key clue is that the home may not recover its full cost.
Background Knowledge
The principle of balance applies internally, to the proportion of land, building and other agents of production, and externally, to how a property fits with its neighborhood. Imbalance can cause an improvement to cost more than it adds to value. Related principles include regression, where a superior property loses value among inferior ones.
Real-World Application
A builder constructs a large luxury home on a small lot among modest starter homes. The appraiser finds that comparable sales do not support the cost and reports value well below what the owner spent.
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
Previous Question
Market data for one market area show a prior-year median closed sale price of $400,000 and a current-year median closed sale price of $440,000. What is the year-over-year percent change in the median sale price?
Next Question
Active listing inventory in a defined neighborhood was 640 homes at the start of a quarter and 544 homes at the end of the same quarter (no change in geography or listing definition). What is the percentage change in listing inventory over the quarter?