A subdivision analysis projects net lot-sale proceeds (after all development costs and incentive) of $1,200,000 received in one year. The market discount rate is 12%. What land value is indicated today?
Correct Answer
D) $1,071,429
Subdivision development analysis is a DCF application: $1,200,000 ÷ 1.12 = $1,071,429. Multiplying by 0.88 (subtracting 12%) over-discounts to $1,056,000; $1,344,000 compounds instead of discounting; $1,200,000 ignores the time value of money.
Why This Is the Correct Answer
Option D is correct because the present value of $1,200,000 received in one year at 12% is $1,200,000 ÷ 1.12 = $1,071,429. Dividing by one plus the rate properly discounts a future amount to today, which is how subdivision development analysis converts net lot proceeds into a raw land value.
Why the Other Options Are Wrong
Option A: $1,200,000
Option A, $1,200,000, is wrong because it uses the future net proceeds with no discounting and ignores the time value of money. The correct value is $1,200,000 ÷ 1.12 = $1,071,429.
Option B: $1,056,000
Option B, $1,056,000, is wrong because it multiplies $1,200,000 by 0.88, subtracting 12% instead of discounting, which over-discounts. The correct calculation is $1,200,000 ÷ 1.12 = $1,071,429.
Option C: $1,344,000
Option C, $1,344,000, is wrong because it multiplies $1,200,000 by 1.12, compounding forward instead of discounting back. The correct present value is $1,200,000 ÷ 1.12 = $1,071,429.
Divide to go back
Moving money back in time means dividing by (1 + rate); moving it forward means multiplying by (1 + rate).
How to use: Use this before any present-value question to check that you are dividing, not multiplying or subtracting.
Exam Tip
If one answer equals the amount times (1 − rate) and another equals the amount divided by (1 + rate), the division is the true present value.
Common Mistakes to Avoid
- -Subtracting the discount rate instead of dividing by one plus the rate
- -Multiplying by one plus the rate, which compounds forward
- -Ignoring the time value of money entirely
Concept Deep Dive
Analysis
This question tests one-period discounting in subdivision development analysis, which is an application of discounted cash flow. Net proceeds received one year from now are worth less today, so they must be divided by (1 + discount rate), not reduced by subtracting the rate.
Background Knowledge
Subdivision development analysis estimates raw land value by projecting finished-lot sales, deducting development costs and entrepreneurial incentive, and discounting the net proceeds to present value at a market-derived rate. Present value for a single future amount equals the amount divided by (1 + rate) raised to the number of periods.
Real-World Application
A developer asks an appraiser to value raw acreage approved for a small subdivision. After deducting all costs and incentive from projected lot sales, the appraiser discounts the net proceeds expected over the sellout period back to the effective date to indicate land value.
More Land/Site Questions
How should an appraiser account for a site's access to public sewer compared with competing sites that require septic systems?
Which fact, if supported by competitive-market evidence, most directly supports a unit-price premium for an otherwise comparable site?
A rectangular site's frontage is doubled while its depth is halved, keeping area constant. What is the likely value effect in a retail district?
A downtown site's zoning height limit is reduced from six stories to three. Buyers in this market had been paying for six-story development potential. What effect on land value is most supportable?
A zoning change increases permitted density from four to eight units per acre. What is the likely effect on site value?
Using the allocation method, market evidence supports a typical land-to-total-property-value ratio of 28% for similar improved properties in the subject’s location. An improved comparable sold for $825,000. What land (site) contribution is indicated by applying that ratio?
An appraiser is valuing a vacant site near a landfill. A similar vacant site that is not affected by the landfill sold for $480,000. Paired land sales indicate that proximity to the landfill lowers site prices by $70,000. No other adjustments apply. What is the indicated value of the subject site?
An appraiser is extracting site value from a $600,000 cash sale. The seller's records show an original construction cost of $250,000 and a depreciated book value of $110,000. The appraiser estimates current replacement cost new at $400,000 and accrued depreciation from all causes at $100,000. What is the indicated site value?
Three parcels assembled under single ownership (standard appraisal guidance assemblage) support separate as-is values of $290,000, $340,000, and $250,000. After assemblage for a higher-utility use, the combined site is valued at $1,050,000. Assemblage costs (demolition, legal, holding, and related) total $55,000. What is the indicated net plottage (plottage increment after assemblage costs)?
A comparable commercial site with 65 front feet sold for a cash-equivalent price of $585,000. Per standard appraisal guidance, sale price per front foot is a vacant-land unit of comparison when frontage is a primary value determinant. The subject site has 72 front feet and is otherwise similar. What indicated land value does the front-foot unit support before other adjustments?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
An appraiser is valuing a vacant site with soil contamination and resulting environmental stigma. A comparable vacant site with neither condition sold for $420,000. Paired land sales indicate a $52,000 discount for the contamination and stigma. No other adjustments apply. What is the indicated value of the subject site?
Next Question
Three parcels assembled under single ownership (standard appraisal guidance assemblage / plottage) support separate as-is values of $310,000, $285,000, and $255,000. After assemblage for a higher-utility use, the combined site is valued at $1,000,000. Assemblage costs (legal, demolition, holding, and related) total $70,000. What is the indicated net plottage (gross plottage increment after assemblage costs)?