Valuation Principles and Procedures
What the exam tests
Valuation principles questions test whether you can distinguish value from price and cost, select the right value definition, and apply economic principles to residential decisions.
Core concepts
- Market value assumes a willing buyer and seller, both informed, no undue stimulus, and reasonable exposure in an open market.
- Price is the amount paid; cost is an expenditure; value is an opinion of worth at a date.
- Investment value is specific to an investor; value in use is specific to a property's current use; liquidation value assumes a forced sale.
- The principle of substitution says a buyer will not pay more for a property than the cost of an equivalent substitute.
- Contribution: a component's value is measured by its effect on market value, not its cost. Anticipation: value reflects expected future benefits. Change: value is date-specific.
Worked example
An owner spends $60,000 adding a pool. Competing homes with pools sell for $35,000 more than similar homes without pools, after adjusting for other differences. Under contribution, the pool contributes $35,000, not $60,000. The remaining $25,000 is a cost that the market does not return. If the appraiser used cost as value, the opinion would exceed market evidence.
Traps
Treating cost new as market value; using investment value for a lending assignment; ignoring effective date; assuming market value equals the highest price; applying physical deterioration as the only depreciation.