What Is Contributory Value?
The term contributory value refers to the amount by which a single component of an asset influences its total value as a whole. Contributory value is commonly used in the real estate industry to show how a single property feature affects the property’s entire value. This value can be either negative or positive, just like the net result.
- Contributory value refers to the amount by which a single component of an asset influences its total value.
- Contributory value is commonly used in the real estate industry to illustrate how just one property feature impacts the value of the entire property.
- Contributory value can be either negative or positive.
Understanding Contributory Value
As mentioned above, the term contributory value is commonly used in the context of real estate, where it specifically references property values. In this situation, it refers to the positive or negative contribution made by a particular feature or component to the whole property’s overall value. A contributory value can result in a net positive or negative result for the property’s overall value based on specific features.
The concept of contributory value comes from the field of value theory. In broad, basic terms, this is the school of thought that examines how people value or appreciate things. Therefore, different features may have vastly different contributory values. Contributory values may also depend on buyer preferences and the state of the economy. For instance, a deck’s contributory value in the backyard may be well below that of a secondary suite with a full kitchen.
Contributory value is often used to determine how a renovation or home improvement project affects a property’s value. This may include a wide range of upgrades or additions, such as a garage, a deck, a new bathroom, or the addition of an in-law suite. It may also refer to the expansion of the property’s lot size when the owner purchases an adjacent property or by improving the existing lot through landscaping or clearing more usable space.
During an economic slowdown, the contributory value of certain features may not necessarily impact a property’s value positively as they would when things are going well.
Example of Contributory Value
Examples of contributory value aren’t that hard to find in everyday life. Almost every component of a single property has contributory value. But each carries a differing degree of importance based on who values them.
For instance, a swimming pool in the backyard of a property that just went on the market may have a contributory value of $10,000 for a family with teenage children. But that same pool may have scant contributory value for a family with toddlers who may consider it a danger.
Likewise, enhancements such as granite countertops in the kitchen and state-of-the-art appliances may be a significant contributor to value in a red-hot real estate market. Still, their contributory value may be diminished in a sluggish housing market.
In some cases, a party or entity may need to calculate the contributory value of a particular portion of the property or land or a single structure located within the larger property piece. For example, suppose an outbuilding is damaged or destroyed. In that case, the value may need to be determined for insurance proceeds to be determined or for the new value of the remaining existing property to be determined.
In some situations, it may also be related to tax assessments, particularly in municipalities where certain structures may be viewed separately or differently for tax purposes than the residence or other parts of the property. Farms are an excellent example of where this happens. These properties and the structures related to the operation of a farming business sometimes fall into that category.
View more information: https://www.investopedia.com/terms/c/contributoryvalue.asp