Market data show a home's value has fallen since its last sale. The appraiser notes four conditions. Which one is explained by the principle of externalities?
Correct Answer
A) A self-storage facility built on the adjoining parcel
Externalities are activities or land uses outside the property, over which its owner has little or no control, that affect its value. A new use on the adjoining parcel fits; the kitchen, the oversized addition and the worn roof are all conditions of the property itself.
Why This Is the Correct Answer
Option A is correct because the self-storage facility is a land use on another parcel, outside the subject and beyond its owner's control. That is exactly what the principle of externalities describes, and the effect on value can be negative or positive.
Why the Other Options Are Wrong
Option B: A dated kitchen the owner chose not to remodel
Option B, a dated kitchen the owner chose not to remodel, is a condition of the home itself and within the owner's control. It is a functional matter, not an external influence.
Option C: An addition larger than local buyers typically want
Option C, an addition larger than local buyers typically want, is an over-improvement of the property itself. It reflects contribution and superadequacy, not an outside land use.
Option D: A roof that needs replacement because of its age
Option D, a roof that needs replacement because of age, is physical wear of the improvement. It arises within the property, so it is not an externality.
Outside the lot line
If the cause sits beyond the property line and the owner cannot control it, think externalities.
How to use: Use this to sort any list of value influences into external ones and internal ones.
Exam Tip
Ask two questions of each option: is the cause off the property, and is it beyond the owner's control? Externalities need both.
Common Mistakes to Avoid
- -Labeling any value loss as an externality
- -Treating over-improvements as external influences
- -Forgetting that externalities can be positive as well as negative
Concept Deep Dive
Analysis
The question asks you to sort causes of value loss by where they come from. Externalities come from outside the property and beyond the owner's control; the other options are internal conditions of the improvements.
Background Knowledge
The principle of externalities recognizes that outside activities and land uses can raise or lower a property's value, such as a sewage plant hurting downwind homes or a new park helping nearby homes. In the cost approach, external obsolescence is the related concept for losses from forces outside the property.
Real-World Application
An appraiser notices that homes backing onto a newly built storage facility sell for less than similar homes a block away. She measures the effect with paired sales and attributes it to the external use.
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