Externalities in appraisal refer to:
Correct Answer
D) Off-site influences that affect a property's value
External influences arise beyond the subject and can affect utility and market value positively or negatively. A highway or park can have benefits and adverse effects depending on access, noise, use and buyer reaction. Site improvements alone are not the same as an external influence.
Why This Is the Correct Answer
Option D is correct because externalities are activities or land uses outside a property, over which its owner has very limited or no control, that can have positive or negative effects on its value.
Why the Other Options Are Wrong
Option A: Legal restrictions recorded against the title
Option A, legal restrictions recorded against the title, is wrong because recorded restrictions are part of the property's legal rights, not off-site influences.
Option B: Costs incurred outside the appraisal's fee budget
Option B, costs incurred outside the appraisal's fee budget, is wrong because externalities describe influences on property value, not the appraiser's expenses.
Option C: Physical features located outside the building
Option C, physical features located outside the building, is wrong because site improvements such as patios or driveways are part of the property, not external influences.
External means beyond the owner
An externality comes from outside the property line and beyond the owner's control, and can push value up or down.
How to use: Use this to separate external influences from features that are part of the property.
Exam Tip
Remember that externalities can be positive as well as negative.
Common Mistakes to Avoid
- -Treating externalities as negative only
- -Calling site improvements external influences
- -Confusing externalities with recorded title restrictions
Concept Deep Dive
Analysis
This question tests the principle of externalities. It concerns influences arising outside the property, over which the owner has little or no control, that can raise or lower value. The distractors confuse external with recorded title matters, fees or outdoor building features.
Background Knowledge
Externalities can be positive, such as a nearby park, or negative, such as heavy traffic noise; some features, like a highway, can have both effects. They help explain external obsolescence, which is a loss in value from causes outside the property.
Real-World Application
A new park opens across the street from a row of homes. The appraiser compares sales before and after to see whether buyers are paying a premium for the view and access.
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
A home’s neighbor operates a noisy auto salvage yard. What does Fannie Mae require the appraiser to consider?
Next Question
A lender appraisal must estimate the timing of sales receipts for 42 remaining finished lots. A supported conditional sales pace is six lots per month. Which analysis addresses this specific timing task?