A typical interior vacant lot is worth $250,000. Market data show a corner premium of 8% of the typical interior-lot value. What is the indicated value of a corner lot?
Correct Answer
C) $270,000
Premium = $250,000 × 0.08 = $20,000; corner indication = $250,000 + $20,000 = $270,000. The indicated result is $270,000. Common errors: deducting the premium instead of adding it gives $230,000; reporting only the premium gives $20,000; grossing up by dividing by 0.92 instead of adding 8% gives $271,739.
Why This Is the Correct Answer
Option C is correct because the corner premium is $250,000 × 0.08 = $20,000, and adding it to the typical interior-lot value gives $250,000 + $20,000 = $270,000. A premium raises the value of the superior corner lot above the interior benchmark.
Why the Other Options Are Wrong
Option A: $20,000
Option A, $20,000, is wrong because it is only the premium ($250,000 × 0.08), not the corner lot's total value. The corner lot is $250,000 + $20,000 = $270,000.
Option B: $230,000
Option B, $230,000, is wrong because it deducts the premium ($250,000 − $20,000) instead of adding it. The correct value is $250,000 + $20,000 = $270,000.
Option D: $271,739
Option D, $271,739, is wrong because it grosses up by dividing $250,000 by 0.92 instead of adding 8% of the typical value. The stated premium is 8% of $250,000, so the value is $250,000 × 1.08 = $270,000.
Premium means plus
A premium is added on top; compute the percentage of the base and add it to the base.
How to use: Use this when a question gives a percentage premium tied to a stated base value.
Exam Tip
Note what the percentage is based on. If it is a percentage of the typical value, multiply the typical value by one plus the rate.
Common Mistakes to Avoid
- -Reporting only the premium amount
- -Subtracting a premium
- -Dividing by one minus the rate instead of multiplying by one plus the rate
Concept Deep Dive
Analysis
This question tests applying a market-supported percentage premium for corner influence. The premium is a percentage of the typical interior-lot value and is added to that value to indicate the corner lot's value.
Background Knowledge
Corner influence is the effect on value of a lot's location at an intersection, which can add or reduce utility depending on use and market. When the market supports a premium, it is applied to the typical interior-lot value. The size and direction of any corner influence must come from market evidence.
Real-World Application
In a commercial strip, corner lots with access from two streets sell for more than interior lots. The appraiser uses paired sales to support a corner premium and adds it to the typical interior-lot value when valuing a corner subject.
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