A comparable improved property sold for $640,000. Market data indicate a land-to-total-property value ratio of 0.40 for similar properties. What land value is indicated by the allocation method?
Correct Answer
A) $256,000
Land = $640,000 × 0.40 = $256,000. The indicated result is $256,000. Common errors: reporting the improvement share instead of the land share gives $384,000; dividing by the ratio instead of multiplying gives $1,600,000; not applying the land ratio gives $640,000.
Why This Is the Correct Answer
Option A is correct because the allocation method allocates a portion of total property value to the site: $640,000 x 0.40 = $256,000. The ratio of 0.40 represents the land share supported by the market. The remaining 60% is the improvement component.
Why the Other Options Are Wrong
Option B: $384,000
Option B, $384,000, reports the improvement share instead of the land share: $640,000 x (1 - 0.40) = $384,000. Land is $640,000 x 0.40 = $256,000.
Option C: $640,000
Option C, $640,000, reports the whole sale price without applying the land ratio. Land is only the allocated portion: $640,000 x 0.40 = $256,000.
Option D: $1,600,000
Option D, $1,600,000, divides by the ratio instead of multiplying: $640,000 / 0.40 = $1,600,000. Land is $640,000 x 0.40 = $256,000.
Allocate a slice
Allocation takes a slice of the total: multiply the total by the land ratio to get the land slice.
How to use: Use this image to remember that the land value must be smaller than the total price.
Exam Tip
The land value from allocation is less than the total price; any answer equal to or larger than the total is wrong.
Common Mistakes to Avoid
- -Applying the improvement ratio instead of the land ratio
- -Dividing by the ratio instead of multiplying
- -Using a ratio not supported for the local market
Concept Deep Dive
Analysis
This question tests the allocation method of land valuation. A market-supported land-to-total ratio is multiplied by the improved property's sale price to isolate the land component. The candidate must apply the land share, not the improvement share, and multiply rather than divide.
Background Knowledge
The allocation method estimates land value by applying a typical land-to-total value ratio to an improved property's price. It is most useful when vacant land sales are scarce. The ratio must be supported by market evidence for similar properties in the same market.
Real-World Application
In a built-out suburb with no recent vacant lot sales, an appraiser studies older sales and assessments to find a typical land-to-total ratio, then applies it to the subject's indicated value to estimate site value.
More Land/Site Questions
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Competitive vacant land sales indicate a mean unit price of $42 per SF. The subject land area is 8,500 SF. What is the indicated land value?
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An appraiser is valuing a residential lot. Five recent sales of comparable vacant lots adjust to a narrow range around $210,000, and extraction from one heavily improved sale in the same area indicates $165,000. What is the most appropriate reconciliation?