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
Reflect a supportable lot-price trend in the relevant projected sale periods and explain its evidence. Also review related absorption, costs and risk consistently. Changing incentive arbitrarily or choosing a different method merely to avoid the forecast does not address the identified revenue issue.
Why This Is the Correct Answer
Option C is correct because the appraiser should consider projected market conditions and neighborhood trends, and a subdivision analysis depends on sales projections and lot pricing. A supported softening trend is reflected in the lot prices for the affected sale periods, with the evidence explained. Related absorption, cost and risk assumptions are then reviewed for consistency.
Why the Other Options Are Wrong
Option A: Ignore it, since only current prices may be used
Option A says to ignore the trend because only current prices may be used. Projected market conditions are a proper part of a forecast-based subdivision analysis, so a supported trend should not be ignored.
Option B: Raise the profit requirement to offset the decline
Option B says to raise the profit requirement to offset the decline. Changing incentive arbitrarily does not address the identified revenue issue; the price trend belongs in the projected sales.
Option D: Value the tract by allocation rather than by this
Option D says to switch to allocation instead. Choosing a different method merely to avoid the forecast does not address the evidence about future lot prices.
Trends go in the timeline
If the market says prices will change, put that change into the sale periods where it happens. Do not hide it elsewhere.
How to use: Use this when a question asks how to treat expected price changes in a cash flow analysis.
Exam Tip
Prefer the answer that reflects the evidence directly in the projection over answers that ignore it or work around it.
Common Mistakes to Avoid
- -Using only today's lot prices for the entire sell-out
- -Adjusting profit to offset a revenue issue
- -Switching methods to avoid making a forecast
Concept Deep Dive
Analysis
This question tests how a subdivision analysis handles a forecast change in lot prices. Projected market conditions and trends are part of the analysis, so a supported softening trend belongs in the projected sales schedule. The appraiser should also check related assumptions such as absorption and risk for consistency.
Background Knowledge
A subdivision development analysis is a forecast of cash flows over the sell-out period. Lot prices, absorption, costs and incentive are projected based on market evidence, and each assumption should reflect expected market conditions and be consistent with the others.
Real-World Application
An appraiser studying a proposed 80-lot subdivision learns that new competing projects will open next year. The market study supports slightly lower lot prices in later years, so the appraiser lowers prices in those periods and checks whether absorption should also slow.
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