The subject is an improved property that sold for a cash-equivalent $1,380,000. Comparable improved sales show a typical land allocation ratio of 18%. What land (site) value does the allocation method indicate?
Correct Answer
D) $248,400
Land allocation is $1,380,000 × 18% = $248,400. The complementary proportion represents the non-land component. Apply only a ratio supported for the relevant market, property type and interests; this ratio reflects the market evidence given and is not a general rule.
Why This Is the Correct Answer
Option D is correct because land allocation equals total price times the land ratio: $1,380,000 x 0.18 = $248,400. The remaining 82% represents the non-land component. The ratio reflects this market and is not a general rule.
Why the Other Options Are Wrong
Option A: $1,380,000
Option A, $1,380,000, reports the whole sale price without applying the land ratio. Land is $1,380,000 x 0.18 = $248,400.
Option B: $1,131,600
Option B, $1,131,600, applies the non-land share instead of the land share: $1,380,000 x 0.82 = $1,131,600. Land is $1,380,000 x 0.18 = $248,400.
Option C: $24,840
Option C, $24,840, misplaces the decimal in the 18% ratio, using 0.018: $1,380,000 x 0.018 = $24,840. The correct calculation is $1,380,000 x 0.18 = $248,400.
Land share times total
Multiply the total price by the land percentage to get land; the rest belongs to the improvements.
How to use: Use this to keep land and improvement shares straight in allocation problems.
Exam Tip
Check that the land share is the smaller portion when the ratio is below 50%, and watch the decimal when converting the percentage.
Common Mistakes to Avoid
- -Applying the improvement share instead of the land share
- -Writing 18% as 0.018
- -Applying a ratio from a different property type or market
Concept Deep Dive
Analysis
This question tests the allocation method using a percentage ratio. The market-supported land allocation ratio of 18% is multiplied by the cash-equivalent improved sale price. The candidate must use the land share and convert the percentage correctly.
Background Knowledge
In the allocation method, a portion of total property value is allocated to the site based on typical land-to-total ratios. The ratio should come from comparable improved sales or other market evidence for the same property type and area. It is often used when vacant land sales are scarce.
Real-World Application
An appraiser values a house in a fully built-out subdivision with no recent lot sales nearby. Using sales where land and improvement values were separately identified, the appraiser derives a typical land ratio and applies it to the subject's sale price.
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