An appraiser has estimated the value of an improved property at $1,450,000. Market data show that land represents 30% of total value for similar improved properties. Using the allocation method, what is the indicated land value?
Correct Answer
C) $435,000
Land allocation is $1,450,000 × 30% = $435,000. The complementary proportion represents the non-land component. Apply only a ratio supported for the relevant market, property type and interests; a land ratio is specific to its market, not a general rule.
Why This Is the Correct Answer
Option C is correct because allocation multiplies total value by the land ratio: $1,450,000 × 30% = $435,000. The remaining 70% represents the non-land component. The ratio must be supported for the relevant market and property type.
Why the Other Options Are Wrong
Option A: $1,450,000
Option A, $1,450,000, is the full improved-property value with no allocation applied. The land share is $1,450,000 × 30% = $435,000.
Option B: $1,015,000
Option B, $1,015,000, is the non-land share ($1,450,000 × 70% = $1,015,000), not the land. The land allocation is $1,450,000 × 30% = $435,000.
Option D: $43,500
Option D, $43,500, misplaces the decimal by using 3% instead of 30% ($1,450,000 × 0.03 = $43,500). The correct calculation is $1,450,000 × 0.30 = $435,000.
Land Slice of the Pie
Total value is the pie, and the land ratio is the land's slice. Multiply the pie by the slice percentage.
How to use: Use this whenever an allocation question gives a ratio and a total value.
Exam Tip
Apply the land ratio, not the improvement ratio. Double-check that 30% becomes 0.30.
Common Mistakes to Avoid
- -Using the improvement percentage instead of the land percentage
- -Converting 30% to 0.03
- -Applying an unsupported ratio from another market
Concept Deep Dive
Analysis
This question tests the allocation method. A market-supported land-to-total ratio is applied to the improved property's indicated value to estimate land. Here, 30% is applied to $1,450,000.
Background Knowledge
The allocation method assigns a portion of total property value to the site using typical land-to-total ratios. It is often used when vacant land sales are scarce and is generally viewed as a supporting rather than primary method. The ratio must be drawn from comparable properties in the same market.
Real-World Application
An appraiser valuing a house in a fully developed neighborhood finds no vacant lot sales. Market data show land typically accounts for about 30% of total value for similar homes, so the appraiser applies that ratio as a supporting land indication.
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