A competitive improved property sold for $500,000. Market data indicate a land-to-value ratio of 0.30 for similar properties. What is the indicated land value by the allocation method?
Correct Answer
A) $150,000
Land = $500,000 × 0.30 = $150,000. The indicated value is $150,000. Common errors: reporting the improvement share instead of the land share gives $350,000; dividing by the ratio instead of multiplying gives $1,666,667; not applying the land ratio gives $500,000.
Why This Is the Correct Answer
Option A is correct because $500,000 × 0.30 = $150,000. Allocation assigns a supported portion of total property value to the site. Multiplying the sale price by the 0.30 ratio gives the land indication.
Why the Other Options Are Wrong
Option B: $350,000
Option B, $350,000, reports the improvement share instead of the land share: $500,000 × (1 − 0.30) = $350,000. Land is $500,000 × 0.30 = $150,000.
Option C: $500,000
Option C, $500,000, does not apply the land ratio at all and simply repeats the sale price. Land is $500,000 × 0.30 = $150,000.
Option D: $1,666,667
Option D, $1,666,667, divides by the ratio instead of multiplying: $500,000 ÷ 0.30 = $1,666,667. Allocation multiplies: $500,000 × 0.30 = $150,000.
Allocation multiplies, not divides
Allocation takes a share of a total, so you multiply by the ratio; dividing would make land bigger than the whole property.
How to use: Use this when deciding whether to multiply or divide by a land ratio.
Exam Tip
Land value from allocation cannot exceed the total property value, so any answer larger than the sale price is wrong.
Common Mistakes to Avoid
- -Dividing by the ratio instead of multiplying
- -Reporting the improvement share as land value
Concept Deep Dive
Analysis
This question tests the allocation method using a competitive improved sale price. The supported land-to-value ratio is multiplied by the sale price to estimate land value. The remaining share represents the improvements.
Background Knowledge
In allocation, a portion of total property value is allocated to the site based on typical market relationships. It can be applied to a single competitive sale or to the subject's total value. The ratio must be supported by market evidence.
Real-World Application
A competitive improved sale in a suburban neighborhood closed at $500,000. Local evidence shows land typically represents 30% of value, so the appraiser allocates $150,000 to the site.
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An appraiser is using the allocation method to estimate land value. Market data indicate a land-to-total value ratio of 27%, and the improved property's indicated value is $1,720,000. What is the indicated land value?
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