Principle of Contribution

In some of your books, this may be called the principle of marginal contribution. The principle of contribution states that the worth of an improvement is what it adds (or contributes) to the market value of the entire property, not what it cost to add the improvement. This is a key factor when deciding to add to existing improvements.

People who buy real estate often believe that if they spend money to add additional improvements to their property, the market value of their property will go up by the cost of the improvement they added on. For example, many people have added swimming pools to their homes or have remodeled their homes because they assume that these improvements will add significantly to the market value of their properties. This is not always the case.

Swimming pools are a common example. Having a pool could add between $5,000 and $10,000 to the value of a home, depending on size, location, design etc. Given that pools cost between $10,000 and $20,000 or more, people should build swimming pools because they like to go swimming, not because it is a wise investment to increase financial gain upon sale.

There are times when improvement can add more than its cost to the resale value of a property. Sometimes adding an additional room can be a very simple procedure (not always!), since when people search for homes the first thing they usually look at is the number of bedrooms and bathrooms.

It is the appraiser’s job to be aware that there can be huge differences in the value of different improvements in different circumstances. A swimming pool in Las Vegas would be worth much more than a pool in Boston. Appraisers will need to run detailed comparisons of similar properties to determine how much value that improvement added. This is all the principle of contribution: how much does an item contribute to the value of the property?