Real Estate Ownership, Land Use Controls, And Financing Practice Test

Which term describes added value is less than the cost of the item?

Diminishing Returns External Obsolescence Assemblage Capitalization

Correct Answer:

Diminishing Returns

Explanation:

Diminishing returns describes the situation where the added value from an investment is smaller than its cost. In real estate, you might invest more money into improvements, but each additional dollar yields a smaller increase in value than the one before. Eventually, further spending can add little value or even reduce overall efficiency, so the value gained does not keep pace with the cost. External obsolescence refers to depreciation caused by factors outside the property, not the relationship between investment cost and value. Assemblage is the process of combining parcels to raise land value, often by creating a larger or more usable parcel. Capitalization is about converting net income into property value, not the diminishing return on investment.

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