A tract yields 25 lots at $95,000 each. Development costs are $900,000, marketing is 6 percent of gross and required profit is 18 percent of gross. Ignoring discounting, what land value is indicated?
Correct Answer
C) $905,000
Why this is correct: This is a development residual (land residual) calculation. First, calculate Gross Sales: 25 lots * $95,000 = $2,375,000. Marketing cost is 6% of gross: 0.06 * $2,375,000 = $142,500. Required profit is 18% of gross: 0.18 * $2,375,000 = $427,500. Total deductions are Development Costs ($900,000) + Marketing ($142,500) + Profit ($427,500) = $1,470,000. Land Value = Gross Sales - Total Deductions = $2,375,000 - $1,470,000 = $905,000. Why the other choices are wrong: '$1,475,000' is wrong; it might be a miscalculation ignoring profit or marketing. '$1,047,500' is wrong; it could result from incorrect percentage application. '$762,500' is wrong; it might subtract costs twice. Exam tip: In residual problems, list all deductions from gross revenue systematically. Land is the leftover 'residual'.
Why This Is the Correct Answer
Option C is correct at $905,000. From $2,375,000 of gross sales, subtract $900,000 of development costs, $142,500 of marketing at 6 percent, and $427,500 of profit at 18 percent, for total deductions of $1,470,000. The residual of $905,000 is what a developer could pay for the raw land and still earn the required return. Both percentages apply to gross sales as the problem specifies, and each deduction appears exactly once.
Why the Other Options Are Wrong
Option A: $1,475,000
$1,475,000 deducts only the $900,000 of development costs, omitting both marketing and profit. That would leave the developer working without compensation and without funds to sell the lots, which no participant would accept. The figure represents an intermediate subtotal rather than a land value.
Option B: $1,047,500
$1,047,500 deducts development costs and the 18 percent profit but leaves out the $142,500 of marketing. The gap from the correct answer is precisely that omitted amount. Marketing is a real cash cost of bringing lots to buyers and belongs in every version of this calculation.
Option D: $762,500
$762,500 sits $142,500 below the correct figure, the signature of deducting the marketing expense a second time. Double-counting typically happens when a candidate subtracts running totals and loses track of which items have already been removed. Listing each deduction once and totaling before subtracting avoids it.
One line per deduction
Write gross sales at the top, then one line each for development, marketing, and profit. Total the deductions once, subtract once. Every wrong answer in this family is a line skipped or a line repeated.
How to use: After computing, check your answer against the distractors by difference. A gap equal to one of the deductions tells you immediately which line the wrong choice mishandled.
Exam Tip
Compute each deduction from gross sales independently rather than from a running balance. Chaining subtractions is what produces the double-count trap.
Common Mistakes to Avoid
- -Subtracting a deduction twice by chaining running balances
- -Omitting marketing or profit
- -Applying percentages to net rather than gross sales when gross is specified
- -Failing to support lot pricing and development cost with market evidence
Concept Deep Dive
Analysis
This is the same subdivision development framework with different inputs, which is exactly how the exam tests whether the method has been learned rather than a single result memorized. Gross sales come from 25 lots at $95,000, or $2,375,000. Marketing at 6 percent of gross is $142,500, required profit at 18 percent of gross is $427,500, and development costs are $900,000. Total deductions of $1,470,000 leave a residual land value of $905,000. Working the percentages off gross sales is essential, since the problem defines both rates that way, and each deduction must be taken exactly once. It is worth noticing that the land here absorbs only about 38 percent of gross sales, a proportion that varies widely with development cost intensity and is itself a useful reasonableness check against local land-to-retail relationships.
Background Knowledge
You need the subdivision development method and fluency in applying stated percentage deductions to the correct base. You should also know that entrepreneurial profit compensates the developer for coordinating the project and bearing its risk, that it is a required deduction, and that a complete analysis discounts lot revenue and costs across the absorption period.
Real-World Application
A builder asks what a 25-lot parcel is worth. You verify finished lot pricing from recent closings, obtain a site development bid, apply local marketing rates and a profit expectation drawn from developer interviews, and deliver a residual land value, noting that a discounted absorption schedule would refine the figure further.
More Land/Site Questions
Under which condition is the land residual technique most applicable?
Why can the same physical parcel carry different values in two assignments?
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?
Why does a developer's required profit rise for a longer subdivision project?
How does holding cost enter the valuation of land bought for future development?
Excess land is best described as land that has which characteristic?
Plottage value arises in which of the following situations?
Which of the following is an off-site improvement rather than a site improvement?
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