An owner builds a very large, high-end house in a neighborhood of small starter homes. Which principle suggests its value will be adversely affected?
Correct Answer
A) Regression
Regression holds that, between dissimilar properties, the value of the superior property is adversely affected by the presence of the inferior. The large house is the superior property here.
Why This Is the Correct Answer
Option A is correct because regression holds that, between dissimilar properties, the value of the superior property is adversely affected by the presence of the inferior. The large high-end house is the superior property surrounded by inferior starter homes. Buyers paying for a luxury home tend to pay less for one located among much lower-value homes.
Why the Other Options Are Wrong
Option B: Progression
Option B, progression, is the opposite effect: the inferior property gains value from being near superior properties. It would describe the starter homes benefiting, not the large house losing value.
Option C: Anticipation
Option C, anticipation, holds that value is the present worth of expected future benefits. It does not address how a superior property is harmed by inferior neighbors.
Option D: Substitution
Option D, substitution, holds that a buyer will pay no more than the cost of an equally desirable substitute. It is not the principle that names the adverse effect of inferior surroundings on a superior home.
Regress Goes Down
To regress is to go backward or down, so the best house goes down in value; to progress is to move up, so the lesser house goes up.
How to use: Use the direction of the word to decide which property's value moves and which way.
Exam Tip
Identify whether the property in question is the better or worse one in its neighborhood: the better one points to regression, the worse one to progression.
Common Mistakes to Avoid
- -Reversing regression and progression
- -Assuming construction cost sets the value of an over-improvement
- -Confusing regression with anticipation or substitution
Concept Deep Dive
Analysis
This question tests the principles that describe how dissimilar neighboring properties affect each other. A large high-end house among small starter homes is the superior property, and the question asks which principle says its value suffers. Regression describes the superior property being pulled down by the inferior ones.
Background Knowledge
Regression and progression are paired principles tied to conformity. Regression lowers the value of a superior property among inferior ones, while progression raises the value of an inferior property among superior ones. Both help explain why over-improvements for a neighborhood often do not recover their full cost.
Real-World Application
An owner builds a 5,000-square-foot custom home in a tract of 1,200-square-foot starter homes. Comparable sales show buyers will not pay the cost of the extra quality in that location, so the appraiser reflects the regression effect in the value.
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