The subdivision development method concludes site value by:
Correct Answer
D) Discounting projected lot revenues less costs over the sellout
Estimate supportable finished-lot proceeds, development and selling/holding costs, required return and absorption timing in one consistent model. Discount the resulting appropriate cash flows to the effective date. Gross retail sellout alone is not raw-land value; avoid counting the same required return twice.
Why This Is the Correct Answer
Option D is correct because the subdivision development method discounts projected lot revenues less costs over the sellout period to present value. Net sales proceeds, after all direct and indirect costs and entrepreneurial incentive, are discounted at a market-derived rate over the development and absorption period to indicate raw land value.
Why the Other Options Are Wrong
Option A: Adding all development costs to the raw land price
Option A is wrong because adding development costs to the raw land price describes a cost buildup, not the subdivision development method. The method starts from lot revenues, deducts costs and discounts the result.
Option B: Multiplying the lot count by the average sale price
Option B is wrong because multiplying the lot count by the average sale price gives gross retail sellout, which ignores development costs, incentive and the time needed to sell the lots.
Option C: Capitalizing a single year of rent collected from the finished lots
Option C is wrong because capitalizing a single year of rent from finished lots is a direct capitalization idea, not the subdivision development method, which discounts net lot-sale proceeds over the sellout.
Sell, subtract, discount
Estimate lot sales, subtract all costs and incentive, then discount the net back to today.
How to use: Use this sequence to recognize the subdivision development method among answer choices.
Exam Tip
Look for the answer that includes both deducting costs and discounting over time; an answer missing either step is incomplete.
Common Mistakes to Avoid
- -Treating gross sellout as raw land value
- -Forgetting to discount over the absorption period
- -Counting the developer's required return twice
Concept Deep Dive
Analysis
This question tests the structure of the subdivision development method. Projected finished-lot revenues are reduced by development and selling costs and entrepreneurial incentive, and the net cash flows over the absorption period are discounted to the effective date to indicate raw land value.
Background Knowledge
Subdivision development analysis is a specific application of discounted cash flow analysis to land. It requires consistent estimates of lot prices, direct and indirect costs, entrepreneurial incentive and absorption timing. The required return should be counted once, either as incentive or within the discount rate, not twice.
Real-World Application
An appraiser values 40 acres approved for 120 lots expected to sell over three years. The appraiser projects quarterly lot sales, deducts site work, fees, marketing and developer incentive, and discounts the net cash flows to the effective date.
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