Two otherwise similar homes in the same subdivision differ only in that one has a finished basement. The home with the finished basement sold six months ago for $400,000; the home without it sold this month for $382,000. Verified paired sales show prices rose 3% over those six months. Finishing the basement cost the owner $45,000. Under the principle of contribution, what does the finished basement contribute to value as of this month?
Correct Answer
B) $30,000
Contribution is measured by the market, not by cost. First bring the older sale to the current date: $400,000 x 1.03 = $412,000. The paired difference is then $412,000 - $382,000 = $30,000. Skipping the time adjustment gives $18,000, averaging the market figure with cost gives $37,500, and $45,000 is the owner's cost, which does not measure contribution.
Why This Is the Correct Answer
Option B is correct because the six-month-old sale must be adjusted upward 3% for rising prices, giving $400,000 x 1.03 = $412,000. Comparing that with the current $382,000 sale isolates the basement: $412,000 - $382,000 = $30,000. That market-derived difference is the basement's contribution, whatever it cost to build.
Why the Other Options Are Wrong
Option A: $18,000
Option A, $18,000, comes from subtracting $382,000 from the unadjusted $400,000. It ignores the 3% market increase since the older sale, so part of the basement's contribution is hidden by the change in market conditions; the correct figure is $412,000 - $382,000 = $30,000.
Option C: $37,500
Option C, $37,500, averages the $30,000 market-derived contribution with the $45,000 cost. Cost is not evidence of contribution, so blending it in overstates the basement's value; the market supports $30,000.
Option D: $45,000
Option D, $45,000, is what the owner spent. Under the principle of contribution, a component is worth what it adds to the whole property, which the time-adjusted pair shows to be $412,000 - $382,000 = $30,000.
Adjust time, then subtract
Put both sales on today's market first, then take the difference. The feature is worth the gap the market shows, not the receipt the owner kept.
How to use: Use this whenever a paired-sales problem gives sale dates that differ and a cost figure that tempts you.
Exam Tip
When a contribution problem includes both a cost and a time trend, expect one distractor that skips the time adjustment and one that uses cost; work the time adjustment first.
Common Mistakes to Avoid
- -Using the owner's construction cost as the contribution
- -Comparing sales from different dates without a market-conditions adjustment
- -Applying the time adjustment to the wrong sale or in the wrong direction
Concept Deep Dive
Analysis
This question tests whether you can extract a component's contribution from paired sales when the two sales occurred at different times. The sales must first be put on the same market-conditions footing; only then does the price difference isolate the basement. Cost is irrelevant to the contribution figure.
Background Knowledge
The principle of contribution says a component's value is measured by how much it adds to the whole property by its presence or detracts by its absence. Paired sales analysis isolates that amount by comparing sales that differ mainly in the one feature, after adjusting for other differences such as market conditions.
Real-World Application
An appraiser finds two nearly identical tract homes, one with a finished basement, that sold six months apart in a rising market. After adjusting the earlier sale for market conditions, the remaining price difference supports the basement adjustment used in the sales comparison grid.
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Under Fannie Mae's Selling Guide, a comparable sold for $412,000, and the seller paid $9,000 of the buyer's closing costs. Concessions of this size are common in the segment. Paired sales show that such concessions raised sale prices in this market by about $6,000. What is the comparable's adjusted sale price for concessions?
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