The principle of balance suggests a property's value suffers when what condition exists?
Correct Answer
A) The agents of production are out of proportion, as in an overbuilt site
Balance concerns the economically productive proportion of land, labor, capital and coordination. An excessive improvement whose incremental cost is not supported by market contribution can be an imbalance. Equal land/building dollar shares are not a requirement.
Why This Is the Correct Answer
Option A is correct because the principle of balance holds that maximum value is attained when the four agents of production are in economic balance. An overbuilt site has too much capital in improvements relative to what the land and market support, so the excess cost does not add equivalent value. That imbalance causes value to suffer.
Why the Other Options Are Wrong
Option B: The improvements match neighborhood norms
Option B, improvements that match neighborhood norms, describes conformity, which generally supports value. It is not a condition in which value suffers under the principle of balance.
Option C: A stable condition where land and building values are roughly equal
Option C, a stable condition where land and building values are roughly equal, misstates balance as an equal dollar split. Balance concerns economically productive proportions, and equal land and building shares are not a requirement.
Option D: The market contains too many participants
Option D, a market with too many participants, relates to market competition and supply and demand, not to the proportion of the agents of production within a property.
Balance is a recipe
Too much of one ingredient spoils a recipe; too much building on a site spoils value. The right proportion, not an equal one, gives the best result.
How to use: Use this image when a question links value loss to over- or underimprovement.
Exam Tip
Separate balance (proportion of production agents) from conformity (fit with the neighborhood) and from market competition.
Common Mistakes to Avoid
- -Thinking balance means land and building values must be equal
- -Confusing balance with conformity
- -Assuming added construction cost adds an equal amount of value
Concept Deep Dive
Analysis
This question tests the principle of balance, which links value to the proportion of the agents of production. Value is maximized when land, labor, capital and entrepreneurship are in economic balance and suffers when they are out of proportion. Look for the option describing an imbalance such as overimprovement.
Background Knowledge
The four agents of production are land, labor, capital and entrepreneurship or coordination. There is a theoretical point of balance in each property where these agents produce the greatest net return; overimprovement or underimprovement moves a property away from that point.
Real-World Application
An owner builds a very large, costly addition on a modest lot in a neighborhood of smaller homes. The appraiser finds the market will not pay for most of the added cost, an imbalance that limits the contribution of the addition.
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
Three closed competitive sales have sale-to-list ratios of 0.96, 0.98, and 1.00. What is the mean sale-to-list ratio?
Next Question
A house with no physical changes sold for $300,000 and resold for $318,000 fourteen months later. Using simple annualization with no compounding, what annualized percentage change is indicated, rounded to one decimal place?