Various economic concepts are employed in an estate. One of which happens to be the principle of contributory value in real estate.
You might have heard of marginal contribution as well.
It states that the worth of an improvement to the value of a property is what it adds to the market value. It does not specify what it entails to make those improvements.
“How much does an item contribute to the overall value of the property?” you may ask.
The Different Types of Principles
Principle of Contribution: An Example
A common misconception in the real estate industry is people believe that increasing costs spent for property improvements increase the market value of their improvements proportionally.
A typical example of this misconception coming into play is adding a swimming pool to their home with the hopes of increasing the market value of the entirety.
That is, depending on the size, location, and design of the home, one could be spending more on the swimming pool than the apparent increase of the cost itself.
In this case, people would be better off building a pool to use and indulge in—not because they want to “invest” in the possibility of financial gains upon sale of a property.
Given this example, people should evaluate the value of the property and decide the improvements they want from there.
Principles of Appraisal
However, the above example with the pool is not always the case.
The person in charge of the appraisal is responsible for figuring out the increments in the value of a property concerning different circumstances.
The appraisal is an important element of the estate industry’s buying and selling process. In this principle, one could estimate the property’s cost at a specific date and situation.
Whether or not an improvement of a property causes an increase in the market value greatly relies on understanding the principle of appraisal and its constituents.
Principle of Contribution
The principle of contribution states how an additional improvement could affect the values of the overall properties.
According to this principle, the cost of an improvement is scaled in terms of its contribution to the financial values of all involved properties as opposed to its individual price.
Given this principle, the overall cost could either increase or decrease depending on the use of the improvement—such as when and where such modifications have been made.
It is most commonly applied to determine how renovation and expansion changes may affect the property’s overall cost.
Value Theory
The concept of contribution relates to the value theory, which concerns how a team appreciates its things. This theory states that different attributes of possessions may entail vastly distinct contributory values.
As far as the estate industry is concerned, it also states that contributory values may depend on personal preferences and the economy’s state in their area.
Change
On the other hand, the principle of change states that properties keep changing over time.
This so-called cycle has four stages: the development stage, stability stage, decline stage, and the revitalization stage.
Substitution
On the other hand, the substitution principle states that people will not pay for a property if it costs less to buy similar properties of the same worth and desirability.
Anticipation
Another important principle to take note of is the principle of anticipation.
This concerns how an owner will benefit from the worth of their properties over time. Anticipation represents the worth of their rights to their respective properties into the future.
What is contributory value appraisal?
Contributory Value (also known as deprival), changes the valuation as a whole, (whether positive or negative), resulting from the addition or deletion of a property component.
Key Takeaways
Simply speaking, contributory value is the amount by which a component of property influences the total value of the property’s entirety.
Different components could easily increase or decrease the property’s value. Moreover, the circumstances in which the properties are present and going through improvement.
Mathematically speaking, this number could be negative or positive depending on the net result.
Given the constant changes being made to the industry, it is important to understand and use the principles to make wise and financial improvements.
Such understanding could also be gathered from passing your real estate exam.
