PSI Virginia Real Estate Practice Exam

What does the Principle of Balance relate to in property value assessment?

1. The relationship between property features and its market demand

2. The relationship between cost, added cost, and the value it returns

3. The comparison of properties in different locations

4. The increase of property value over time

The correct answer is: The relationship between cost, added cost, and the value it returns

The Principle of Balance relates to the relationship between cost, added cost, and the value it returns. This principle emphasizes that the best value is achieved when the components of a property are in balance with one another. It suggests that over-improving a property—adding features or amenities that do not proportionately increase the property's value—can lead to diminishing returns. Conversely, under-improving can also lead to a decrease in perceived value. In a practical sense, this means that real estate appraisers and agents need to analyze whether the investments made into a property align with the expected increase in market value. For a property to reach its highest and best use, it must achieve a balance where the costs of improvements or features do not exceed the financial returns they generate, ensuring that the property remains competitive in the market. Other choices—while they may touch on aspects of property value and market analysis—do not capture the essence of the Principle of Balance as described. The focus on the relationship between costs and value return is central to understanding how balance affects property valuation.