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. These are all of the nonland costs and incentive. Ignoring discounting, what land value is indicated?
Correct Answer
A) $905,000
Gross sales = 25 × $95,000 = $2,375,000; marketing = $142,500; incentive = $427,500; residual = $2,375,000 − $900,000 − $142,500 − $427,500 = $905,000. The indicated value is $905,000. This is the result under the stated inputs, not a universal market ratio or an approval of a proposed development. Common errors: leaving out marketing and profit gives $1,475,000; leaving out the developer profit gives $1,332,500; leaving out the marketing cost gives $1,047,500.
Why This Is the Correct Answer
Option A is correct because the residual after all listed non-land costs and incentive is the land indication. Gross sales are 25 × $95,000 = $2,375,000; marketing is 6% = $142,500; profit is 18% = $427,500; land = $2,375,000 − $900,000 − $142,500 − $427,500 = $905,000.
Why the Other Options Are Wrong
Option B: $1,047,500
Option B, $1,047,500, leaves out the marketing cost: $2,375,000 − $900,000 − $427,500 = $1,047,500. Deducting the $142,500 marketing as well gives $905,000.
Option C: $1,332,500
Option C, $1,332,500, leaves out the developer profit: $2,375,000 − $900,000 − $142,500 = $1,332,500. Deducting the $427,500 profit as well gives $905,000.
Option D: $1,475,000
Option D, $1,475,000, leaves out both marketing and profit: $2,375,000 − $900,000 = $1,475,000. All listed deductions must be subtracted, giving $905,000.
Sales minus all costs and profit
Land residual = gross lot sales − development costs − marketing − profit. Whatever survives all the deductions is what a developer can pay for the land.
How to use: Use this checklist to make sure no deduction is skipped in a subdivision residual problem.
Exam Tip
Compute percentage deductions on gross sales when the question says 'of gross,' and check that each listed cost is subtracted once.
Common Mistakes to Avoid
- -Forgetting to deduct developer profit
- -Omitting marketing or selling costs
- -Treating the undiscounted residual as a complete present-value conclusion
Concept Deep Dive
Analysis
This question tests the subdivision development method in an undiscounted form. Start with gross lot sales, then deduct all non-land costs: development costs, marketing and developer profit. The remainder is the residual indication for the raw land.
Background Knowledge
The subdivision development method projects the gross sales of finished lots and subtracts total development costs, including selling expenses and entrepreneurial incentive, to derive raw land value. A fuller analysis discounts the net proceeds over the sell-out period to reflect the time value of money.
Real-World Application
An appraiser values a raw acreage tract proposed for a 25-lot subdivision. She projects lot prices from comparable finished-lot sales, estimates site development, marketing and developer profit, and in a full assignment discounts the net proceeds over the expected absorption period.
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