In valuing raw land for subdivision, why should the appraiser conduct an absorption study?
Correct Answer
A) To measure supply and demand and project the time to sell the lots
In the subdivision method, an absorption study is conducted to determine market supply and demand and to project a marketing time frame for selling the developed units. Costs, lot sizes and zoning are separate inputs.
Why This Is the Correct Answer
Option A is correct because in the subdivision method the appraiser conducts an absorption study to determine market supply and demand and to project a marketing time frame for selling the developed units. The projected sell-out period is a key input in valuing the raw land.
Why the Other Options Are Wrong
Option B: To estimate the cost of streets and utilities for the lots
Option B, to estimate the cost of streets and utilities for the lots, describes development cost estimates. Costs are a separate input, not the purpose of an absorption study.
Option C: To measure the physical size of each planned lot in the plat
Option C, to measure the physical size of each planned lot in the plat, is a physical description task. Lot dimensions come from the plat, not from an absorption study.
Option D: To set the zoning density allowed for the project
Option D, to set the zoning density allowed for the project, is a legal matter controlled by the zoning authority. An appraiser does not set zoning through an absorption study.
Absorption means how fast
Absorption is how fast the market soaks up new lots. It measures demand against supply and gives the sell-out time.
How to use: Use this to separate absorption from cost, size and zoning inputs.
Exam Tip
Link absorption with time and demand. Answers about costs, physical measurements or legal limits describe other parts of the analysis.
Common Mistakes to Avoid
- -Confusing absorption analysis with cost estimating
- -Thinking the appraiser sets zoning density
- -Ignoring the sell-out period when discounting lot sales
Concept Deep Dive
Analysis
This question tests the purpose of an absorption study in the subdivision development method. The study measures market supply and demand and projects how long it will take to sell the developed lots or units. That timing drives the discounting of future sale proceeds.
Background Knowledge
The subdivision development method estimates raw land value by projecting lot or unit sales, deducting development costs and profit, and discounting over the sell-out period. Absorption analysis supplies the expected rate of sales. Costs, lot sizes and zoning are separate inputs.
Real-World Application
Valuing a 60-lot tract, an appraiser studies competing subdivisions and finds the market absorbs about two lots per month. She uses that pace to project a sell-out period and discount the projected lot sales to present value.
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