In a proposed subdivision, 20 finished lots are expected to sell for $95,000 each. All non-land development, selling and holding costs plus entrepreneurial incentive total $1,250,000. Ignoring the timing of all receipts and payments, what residual remains for the land?
Correct Answer
B) $650,000
Gross sellout is 20 × $95,000 = $1,900,000. Subtract the stated total non-land costs and incentive: $1,900,000 − $1,250,000 = $650,000. Timing is ignored here. A full subdivision analysis must model absorption, cash-flow timing and appropriately supported returns. Common errors: stopping at gross sellout gives $1,900,000; reporting the cost total gives $1,250,000; adding the costs to sellout instead of subtracting them gives $3,150,000.
Why This Is the Correct Answer
Option B is correct because gross sellout is 20 × $95,000 = $1,900,000, and $1,900,000 − $1,250,000 = $650,000 remains for the land. Total development costs are subtracted from projected lot sales to estimate vacant land value. Because timing is ignored, this undiscounted residual is the answer.
Why the Other Options Are Wrong
Option A: $1,900,000
Option A, $1,900,000, is gross sellout of 20 × $95,000 before deducting costs. The land residual is $1,900,000 − $1,250,000 = $650,000.
Option C: $1,250,000
Option C, $1,250,000, is the total of non-land costs and incentive, not the land residual. Subtracting it from sellout gives $1,900,000 − $1,250,000 = $650,000.
Option D: $3,150,000
Option D, $3,150,000, adds the costs to sellout instead of deducting them: $1,900,000 + $1,250,000 = $3,150,000. Costs and incentive reduce what is left for the land, so the residual is $1,900,000 − $1,250,000 = $650,000.
Sellout minus costs equals land
The land is paid last: lot sales come in, all costs and developer incentive go out, and the remainder belongs to the land.
How to use: Use this when a question gives lots, price per lot and total non-land costs.
Exam Tip
Compute gross sellout first, then subtract the costs; a land residual should be smaller than the gross sellout.
Common Mistakes to Avoid
- -Using gross sellout as land value
- -Adding development costs to sellout instead of deducting them
- -Reporting the cost total as the land residual
Concept Deep Dive
Analysis
This question tests the undiscounted subdivision development method. Multiply the lot count by the lot price to get gross sellout, then subtract non-land costs and entrepreneurial incentive. Timing is expressly ignored, so no discounting is needed.
Background Knowledge
The subdivision development method values raw land as projected finished-lot sales minus development, selling and holding costs and entrepreneurial incentive. A full analysis discounts the net cash flows over the sellout period to reflect timing and risk.
Real-World Application
A builder considering a 20-lot tract asks what the raw land can support. The appraiser projects lot prices, subtracts development and marketing costs plus developer profit, and in a full report discounts the cash flows over the absorption period.
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