A market study shows lot prices in a proposed subdivision are likely to soften during the sell-out. How should the appraiser handle this?
Correct Answer
C) Reflect the trend in the projected sales schedule
Why this is correct: The subdivision development method projects future lot sales over time. If a market study indicates declining prices, the projected sales schedule should reflect lower prices in later periods to accurately forecast revenue. Why the other choices are wrong: "Ignore it, since only current prices may be used" is wrong; the method requires forward-looking projections. "Raise the profit requirement to offset the decline" is wrong; that conflates market forecast with developer profit. "Value the tract by allocation rather than by this" is wrong; allocation is a different method not suited for subdivision analysis. Exam tip: In development methods, incorporate market trends directly into the revenue projection, not indirectly into other inputs.
Why This Is the Correct Answer
Why this is correct: The subdivision development method projects future lot sales over time. If a market study indicates declining prices, the projected sales schedule should reflect lower prices in later periods to accurately forecast revenue. Why the other choices are wrong: "Ignore it, since only current prices may be used" is wrong; the method requires forward-looking projections. "Raise the profit requirement to offset the decline" is wrong; that conflates market forecast with developer profit. "Value the tract by allocation rather than by this" is wrong; allocation is a different method not suited for subdivision analysis. Exam tip: In development methods, incorporate market trends directly into the revenue projection, not indirectly into other inputs.
More land-or-site-valuation Questions
Under which condition is the land residual technique most applicable?
What is the appraiser's obligation when a site's legal description does not match its apparent physical boundaries?
Why can the same physical parcel carry different values in two assignments?
A site differs from land in that a site is best described as which of the following?
In a built-up area where no vacant land has sold for years, which approach to site value is the usual fallback?
How is entrepreneurial profit treated in the subdivision development method?
A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
In a land residual analysis for a proposed office development, the appraiser estimates total annual net operating income (NOI) will be $1,250,000. The improvement value, derived via the cost approach, is $15,000,000. Market evidence indicates a 7.0% overall capitalization rate is appropriate for similar improved properties. What is the indicated land value?
A developer plans a 36-lot residential subdivision on raw land. Each lot is expected to sell for $85,000. Total development costs (excluding land) are $1,420,000, including $220,000 for entrepreneurial incentive. The developer requires a 12% annual yield on invested capital over a 3-year development period. Using the subdivision development method, what is the maximum price the developer should pay for the land if all lots sell at the projected price and timing?
In applying the land residual technique to a proposed subdivision, an appraiser estimates that the time required to fully absorb all lots will be 6 years. The developer requires a 10% annual yield on invested capital. Which discounting approach is most appropriate for converting future net proceeds to present value?
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