A proposed subdivision will have eight finished lots, each projected to sell for $95,000. Total development costs are $380,000 and entrepreneurial profit is $95,000. These amounts cover all non-land deductions, with no double counting. Ignoring the timing of cash flows, what land value does the subdivision development method indicate?
Correct Answer
A) $285,000
Gross sales = 8 × $95,000 = $760,000; residual = $760,000 − $380,000 − $95,000 = $285,000. The indicated result is $285,000. Common errors: leaving out the development costs gives $665,000; leaving out the entrepreneurial profit gives $380,000; reporting the gross sellout gives $760,000.
Why This Is the Correct Answer
Option A is correct because gross sales are 8 × $95,000 = $760,000, and the residual is $760,000 − $380,000 − $95,000 = $285,000. The land value is what remains after deducting all nonland costs and profit. The stem confirms there is no double counting and timing is ignored.
Why the Other Options Are Wrong
Option B: $380,000
Option B, $380,000, leaves out the entrepreneurial profit: $760,000 − $380,000 = $380,000. Profit must also be deducted, giving $285,000.
Option C: $665,000
Option C, $665,000, leaves out the development costs: $760,000 − $95,000 = $665,000. Both deductions are required, giving $760,000 − $380,000 − $95,000 = $285,000.
Option D: $760,000
Option D, $760,000, reports the gross sellout with no deductions. The land residual is $760,000 − $380,000 − $95,000 = $285,000.
Sellout minus costs minus profit
Start with what the lots will sell for, then take out the cost to build them and the developer's profit; the land is what is left.
How to use: Use this order on any static subdivision residual question.
Exam Tip
Check that every nonland deduction named in the stem is subtracted once; choices that omit one deduction are common distractors.
Common Mistakes to Avoid
- -Omitting entrepreneurial profit from the deductions
- -Omitting development costs from the deductions
- -Ignoring that a fuller analysis would discount for time
Concept Deep Dive
Analysis
This question tests a subdivision development residual. Find gross sellout by multiplying lots by price, then subtract development costs and entrepreneurial profit. Timing is ignored here, so no discounting is needed.
Background Knowledge
In the subdivision development method, total development costs are subtracted from the projected gross sales of the finished lots to derive land value. Entrepreneurial profit is also deducted as a cost of bringing the project to market. A fuller analysis considers the time value of money by discounting over the sellout period.
Real-World Application
An appraiser values raw acreage proposed for an 8-lot subdivision. Using supported lot prices, development cost estimates and a market-derived profit, the appraiser runs a simple residual and then considers whether the sellout period calls for discounting.
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