Under the principle of contribution, a component's value is measured by:
Correct Answer
A) Its effect on the value of the whole property
Contribution measures a component’s supported effect on value of the whole property. Installation cost, size and remaining life can inform analysis but do not independently establish what buyers pay. The contribution can be less or more than cost, or even adverse.
Why This Is the Correct Answer
Option A is correct because the principle of contribution measures a component's value by its effect on the value of the entire property, that is, how much it adds by its presence or detracts by its absence.
Why the Other Options Are Wrong
Option B: The cost of installing it originally
Option B, the cost of installing it originally, is wrong because contribution can be less or more than cost; a pool that cost $25,000 may contribute only $10,000 to value.
Option C: Its physical size relative to the building
Option C, its physical size relative to the building, is wrong because a larger component does not necessarily add more value; buyers pay for its effect on the whole.
Option D: The length of its remaining useful life
Option D, the length of its remaining useful life, is wrong because remaining life may inform depreciation but does not by itself measure what the component adds to value.
What it adds, not costs
A feature is worth what it adds to the whole property's value, not what it cost to install.
How to use: Use this when choosing between cost and market-effect answers on contribution questions.
Exam Tip
Contribution questions often tempt you with cost; focus on the effect on the whole property's value.
Common Mistakes to Avoid
- -Adjusting for features at their installation cost
- -Assuming bigger components contribute more
- -Ignoring that a feature can detract from value
Concept Deep Dive
Analysis
This question tests the principle of contribution. A component's value is measured by how much it adds to, or detracts from, the value of the whole property. Its cost, size or remaining life may inform the analysis but do not set its contribution.
Background Knowledge
Contribution underlies the adjustments in the sales comparison approach, which reflect what the market pays for a feature rather than what it cost. A component's contribution can be positive, negative or less than its cost, depending on buyer reaction in the market.
Real-World Application
A homeowner spent heavily on a backyard pool and expects the appraisal to reflect the full cost. The appraiser uses paired sales showing buyers pay much less than cost for pools in that neighborhood and adjusts accordingly.
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