A subdivision developer forecasts sales of 20 lots per year. Independent analysis of demand, competition and the subject’s market share supports only 8 subject lots per year, with no evidence of a change. What should the appraiser do?
Correct Answer
B) Use the market rate and extend the sell-out period
Use a supportable project absorption estimate based on demand, competing supply, prices and the project’s attainable share. If the supported subject rate is eight lots per year, a twenty-lot projection needs credible additional evidence. Extend cash-flow timing accordingly; do not average unsupported and supported forecasts.
Why This Is the Correct Answer
Option B is correct because the appraiser should use the supported market absorption rate of 8 lots per year and lengthen the sell-out period accordingly. A 20-lot-per-year projection would need credible additional evidence, and none is given. Extending the timing makes the discounted cash flow reflect what the market can actually absorb.
Why the Other Options Are Wrong
Option A: Accept the projection as the developer's business plan
Option A, accepting the developer's projection as a business plan, is wrong because an appraiser must support absorption with market evidence of demand, supply and capture rate. A forecast of 20 lots per year that market analysis does not support would overstate value.
Option C: Average the two figures to produce a middle estimate
Option C, averaging the two figures to get a middle estimate, is wrong because blending an unsupported forecast with a supported one simply builds part of the unsupported number into the analysis. A middle figure of 14 lots per year has no market support of its own.
Option D: Value the tract by allocation to avoid the question
Option D, switching to allocation to avoid the question, is wrong because changing methods to sidestep an absorption problem is not sound analysis. A subdivision tract valued for lot sales calls for supported absorption, and avoiding the issue does not make the conclusion credible.
Market pace sets the pace
The market, not the developer, decides how fast lots sell. Slower supported sales mean a longer sell-out and a lower present value.
How to use: Use this when a question contrasts an owner's projection with independent market analysis.
Exam Tip
When an answer choice relies on the supported market figure and adjusts the timing to match, it is usually stronger than accepting, averaging or avoiding the conflicting figure.
Common Mistakes to Avoid
- -Adopting the developer's sales forecast without market support
- -Splitting the difference between a supported and an unsupported forecast
- -Keeping the original sell-out period while lowering the annual sales rate
Concept Deep Dive
Analysis
This question tests whether the appraiser relies on supported market absorption rather than a developer's optimistic forecast. When independent analysis of demand, competing supply and capture supports only 8 lots per year, the cash-flow timing should reflect that rate unless credible evidence supports more. The reasoning is that value rests on what the market will absorb, not on what an owner hopes to sell.
Background Knowledge
Subdivision development analysis projects lot sales over time, deducts costs and discounts the net proceeds to a present value. The absorption rate drives the length of the sell-out period and therefore the present value. Absorption should rest on demand, competing supply, pricing and the subject's attainable market share.
Real-World Application
A developer tells the appraiser a new 80-lot subdivision will sell out in four years. The appraiser's market study of competing subdivisions supports about 8 lot sales per year for the subject, so the discounted cash flow uses a ten-year sell-out, producing a lower present value than the developer expected.
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