As of one effective date and on consistent timing and risk assumptions, continued use as a single-unit house has a whole-property value of $500,000. Feasible townhouse redevelopment yields $800,000 after all construction costs, required return and other allowances except an immediate $50,000 demolition cost. Which of these two alternatives has the higher net value?
Correct Answer
D) Redevelop townhouses: net $750,000 exceeds $500,000
Continued use indicates $500,000 for the whole property. The specified redevelopment net is $800,000−$50,000=$750,000, exceeding continuation by $250,000. This compares compatible whole alternatives rather than only the $200,000 building contribution. Deducting the $500,000 continued-use value from the redevelopment figure as well would wrongly leave only $250,000.
Why This Is the Correct Answer
Option D is correct because the redevelopment net is $800,000 − $50,000 = $750,000, which exceeds the $500,000 value of continued use as a house by $250,000. Both figures are whole-property values at the same effective date on compatible assumptions, so they can be compared directly.
Why the Other Options Are Wrong
Option A: Continue the house because its building alone contributes $200,000
Option A, continue the house because its building alone contributes $200,000, compares only a building contribution instead of whole-property alternatives. The correct comparison is $500,000 for continued use versus $800,000 − $50,000 = $750,000 for redevelopment.
Option B: Continue the house: redevelopment nets just $250,000
Option B, continue the house because redevelopment nets just $250,000, subtracts the $500,000 continued-use value from redevelopment as well: $800,000 − $50,000 − $500,000 = $250,000. That counts the existing use against redevelopment twice; the correct net is $800,000 − $50,000 = $750,000, which exceeds $500,000.
Option C: Demolish without redeveloping, with no reason given
Option C, demolish without redeveloping with no reason given, is not one of the two alternatives and no value is given for it; the facts support demolition only as part of the $750,000 net redevelopment.
Net the demolition, then compare
Subtract all costs of the new use, including demolition, then compare whole-property values side by side.
How to use: Use this in any question asking whether to keep or replace existing improvements.
Exam Tip
Check that both alternatives are measured the same way and that all remaining costs, such as demolition, have been deducted, but do not also subtract one alternative's value from the other.
Common Mistakes to Avoid
- -Forgetting to deduct demolition cost
- -Subtracting the continued-use value from the redevelopment value before comparing
- -Comparing a building contribution with a whole-property value
Concept Deep Dive
Analysis
This question tests comparing alternative uses on a consistent whole-property basis. Continued use as a house is worth $500,000. Redevelopment yields $800,000 after all costs except the $50,000 demolition cost, so its net is $750,000. The two whole-property values are compared side by side; neither is deducted from the other before the comparison.
Background Knowledge
In highest and best use as improved, the appraiser compares the value of continuing the existing use with the value of alternatives such as renovation or redevelopment, net of the costs required. Demolition costs must be deducted from the redevelopment alternative. The alternatives must be measured at the same date and on compatible risk and timing assumptions.
Real-World Application
An appraiser studies an aging house on a lot now zoned for townhouses. After deducting demolition cost from the supported redevelopment value, the appraiser finds the townhouse alternative produces a higher net value than continued use as a house.
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