Homes in a tract subdivision of three-bedroom ranches sell between $290,000 and $330,000. The owner of the subject built a 1,000-square-foot heated garage with a workshop at a cost of $110,000, and no other home in the area has a similar building. The appraiser's depreciated cost estimate for the building is $100,000. Why is that figure likely to overstate the building's contribution to value?
Correct Answer
D) Area buyers are unlikely to pay full cost for a feature far above local norms
A feature is worth what it contributes to the whole property, not what it cost, and buyers of $290,000 to $330,000 ranches are unlikely to pay $100,000 more for an oversized garage no other home has. That gap between cost and market reaction is why depreciated cost overstates contribution for an over-improvement. Omitting entrepreneurial incentive would make the cost figure lower, not higher, and neither a new building's slight deterioration nor rising construction costs explain why buyers would pay less than cost.
Why This Is the Correct Answer
Option D is correct because value contribution is measured by what the feature adds to the whole property in this market. A $100,000 depreciated cost on a building attached to a $290,000 to $330,000 ranch exceeds what typical buyers in that range will pay, so the cost figure overstates the contribution.
Why the Other Options Are Wrong
Option A: Depreciated cost omits the entrepreneurial incentive a builder would expect
Option A says depreciated cost omits the entrepreneurial incentive. Leaving out incentive would make the cost figure lower, so it cannot explain why cost overstates the building's contribution.
Option B: Physical deterioration has not been deducted from the estimate
Option B says physical deterioration has not been deducted. The $100,000 figure is already a depreciated cost, so deterioration is reflected; the gap between cost and value comes from buyers' reaction to an over-improvement, not from deterioration.
Option C: Construction costs have risen in the area since the building was completed
Option C points to rising construction costs since completion. Higher current costs would affect the cost estimate, but they do not explain why buyers in this subdivision would pay less than the building's cost.
Cost is spent, value is paid
The owner spent the cost; only buyers decide the value. When a feature is far beyond what the neighborhood's buyers expect, they pay less than it cost.
How to use: Use this when a question pairs a large feature cost with a modest neighborhood price range.
Exam Tip
When the feature is unusual for the area, expect contributory value to fall below cost. Options about how the cost estimate is built do not explain a market gap.
Common Mistakes to Avoid
- -Treating the owner's cost as the feature's value
- -Using depreciated cost for a feature the neighborhood's buyers do not want
- -Assuming a nearly new improvement adds its full cost
Concept Deep Dive
Analysis
The question tests why cost can exceed contributory value. A feature that far exceeds what the neighborhood's buyers want is an over-improvement: its cost is real, but the market pays only part of it. The candidate must separate that market reason from technical points about how the cost estimate is built.
Background Knowledge
The principle of contribution holds that a component is worth what it adds to the value of the whole property, which can be far less than its cost. An improvement well beyond the market's standard is a superadequacy or over-improvement. Adjustments in the sales comparison approach should reflect a feature's contributory effect, not simply its cost.
Real-World Application
An appraiser values a modest ranch whose owner built a large heated shop for a hobby. Sales of homes with oversized outbuildings in similar neighborhoods show buyers pay a small premium, so the appraiser adjusts far below the shop's depreciated cost and explains why.
More Sales Comparison Questions
Supported adjustments are: non-market financing $10,000, GLA $36/sf, garage $3,500 per car, pool/spa $12,500. A comparable identical to the 2,800 sf subject sold for $267,000 with non-market financing. What is its adjusted price?
Using GLA $36/sf and non-market financing $10,000: a 3,100 sf comparable sold for $277,000 with non-market financing; the subject has 2,800 sf. Bath count differences are not adjusted. What is the adjusted price?
Using garage $3,500 per car and pool/spa $12,500: a comparable with a 2-car garage and a pool/spa sold for $268,000. The subject has a 3-car garage and no pool. What is the adjusted price?
Using GLA $36/sf, garage $3,500 per car and pool/spa $12,500: a 2,600 sf comparable with a 2-car garage and a pool/spa sold for $264,000. The subject is 2,800 sf with a 3-car garage and no pool. What is the adjusted price?
In a neighborhood with declining values and marketing times over six months, what must Fannie Mae lenders confirm about the sales comparison analysis?
A house is a 4,000 square foot home in an area of 2,000 square foot homes. How must the appraiser treat this over-improvement in the sales comparison grid?
According to the Interagency Appraisal and Evaluation Guidelines, which items should an appraisal’s market conditions discussion include?
A comparable listed at $420,000 and sold for $399,000. What sale-to-list price ratio (sale price ÷ list price) does this indicate?
An appraiser wants to describe the neighborhood boundaries in a Fannie Mae report. Which approach is acceptable?
Which of these is listed by Fannie Mae as a sales or financing concession?
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Recorded comparable price is $275,000. Market evidence expressly attributes $6,000 of that price to financing concessions, not merely the concession’s seller cost. Remove that verified price effect first, then apply a supported total 3% time increase to the cash-equivalent balance. What result follows?
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