Property ValuationIntermediateAlaska Exam

The principle of contribution in real estate valuation states that:

AThe value of a component equals its cost to install, though outcomes can differ depending on circumstances

BThe value of a component is measured by what it contributes to the overall property value, not its costCorrect

CAll improvements contribute equally to value

DImprovements always add more value than they cost

Why The value of a component is measured by what it contributes to the overall property value, not its cost Is Correct

Answer B: The value of a component is measured by what it contributes to the overall property value, not its cost

The principle of contribution says the value of any component is what it adds to the whole property's value. Adding a fourth bedroom to a two-bedroom house adds more than adding a fifth to a four-bedroom.

Exam Tip: Property Valuation

Valuation questions focus on the three approaches to value: sales comparison, cost, and income. Know which approach is best for which property type. The income approach uses cap rate and NOI — memorize these formulas.

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Key Terms to Know

Appraisal

A professional estimate of a property's market value prepared by a licensed or certified appraiser.

Capitalization Rate (Cap Rate)

A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.

Gross Rent Multiplier (GRM)

A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.

Net Operating Income (NOI)

The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.

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