Sales ComparisonMEDIUM16.4% of exam

The principle of contribution states that:

Correct Answer

D) A component’s value is what it adds to the overall property value

Under the principle of contribution, a component’s value is measured by what it adds to (or, by its absence, takes from) the value of the whole property in its market. That contribution can be more or less than its cost and can differ from one property or market to another. Conformity is a separate principle.

Answer Options

A component’s value equals its cost to build or install

Each improvement adds the same amount wherever it is located

Properties must follow a required neighborhood design rule

A component’s value is what it adds to the overall property value

Why This Is the Correct Answer

Option D is correct because the principle of contribution measures a component's value by what it adds to the value of the whole property, or what its absence takes away. For example, a pool that market data show adds $10,000 has a value of $10,000 even if it cost $25,000 to build. That contribution depends on the market rather than on cost.

Why the Other Options Are Wrong

Option A: A component’s value equals its cost to build or install

Option A says a component's value equals its cost to build or install. Under contribution, value is what the market pays for the component, which can be more or less than its cost, as the $10,000 pool that cost $25,000 shows.

Option B: Each improvement adds the same amount wherever it is located

Option B says each improvement adds the same amount wherever it is located. Contribution depends on the market, so the same improvement can add different amounts in different neighborhoods or property types.

Option C: Properties must follow a required neighborhood design rule

Option C describes a required neighborhood design rule, which relates to conformity or to private or public land-use controls, not to the principle of contribution.

Value added, not money spent

Ask what the buyer pays extra for the feature, not what the owner paid to install it. The $25,000 pool worth $10,000 is the classic picture.

How to use: Use this when an answer equates a feature's cost with its value.

Exam Tip

Answers that tie value to cost or claim a feature has a fixed value everywhere describe something other than contribution.

Common Mistakes to Avoid

-Adjusting for a feature at its construction cost
-Assuming a feature adds the same value in every market
-Confusing contribution with conformity

Concept Deep Dive

Analysis

This question tests the definition of the principle of contribution. The key idea is that a component is worth what it adds to the value of the whole property, not what it cost. Separate this from conformity, which deals with how well a property fits its surroundings.

Background Knowledge

The principle of contribution underlies line-item adjustments in the sales comparison approach. Each feature is adjusted for its market contribution, which is often found through paired sales or other market analysis. Cost may be a reference point, but it does not by itself establish market value.

Real-World Application

An owner spent heavily on a high-end kitchen in a modest neighborhood. Paired sales show buyers in that market pay only part of that cost, so the appraiser adjusts for the kitchen's market contribution rather than its cost.

principle of contributioncomponent valuecost versus valueadjustmentsconformity

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