Real Estate Council of Alberta Fundamentals Practice Exam

What principle indicates that factors external to the property itself can impact its valuation?

1. Principal of External Factors

2. Principal of Contribution

3. Principal of Progression

4. Principal of Increasing/Decreasing Return

The correct answer is: Principal of External Factors

The principle that indicates factors external to the property can impact its valuation is known as the principle of external factors. This principle recognizes that properties do not exist in isolation; rather, their value can be influenced by various external elements such as the economic environment, neighborhood characteristics, local amenities, and public policies. For example, if a new shopping center is developed nearby, it could enhance the desirability and value of surrounding properties, demonstrating how external factors play a significant role in valuation. In contrast, other principles such as the principle of contribution focuses more on how a particular component of a property contributes to its overall value, while the principle of progression and the principle of increasing/decreasing return concern themselves with how property values can increase or decrease based on surrounding properties and the efficiency of investment, respectively. These principles address valuation from different perspectives but do not specifically highlight the broader external influences that can affect property value in the same way as the principle of external factors.