An appraiser estimates that 40 finished lots in a subdivision will sell for $85,000 each. All non-land development, selling and holding costs plus entrepreneurial incentive total $2,100,000. Ignoring the timing of all receipts and payments, what residual remains for the land?
Correct Answer
D) $1,300,000
Gross sellout is 40 × $85,000 = $3,400,000. Subtract the stated total non-land costs and incentive: $3,400,000 − $2,100,000 = $1,300,000. Timing is ignored here. A full subdivision analysis must model absorption, cash-flow timing and appropriately supported returns.
Why This Is the Correct Answer
Option D is correct because gross sellout is 40 x $85,000 = $3,400,000, and subtracting the $2,100,000 of non-land costs and incentive leaves $3,400,000 - $2,100,000 = $1,300,000 for the land. The development method derives land value by deducting total development costs from projected lot sales. Timing is ignored, so this undiscounted residual is the answer.
Why the Other Options Are Wrong
Option A: $5,500,000
Option A, $5,500,000, adds the non-land costs and incentive to the gross sellout ($3,400,000 + $2,100,000) instead of deducting them. Costs reduce what is left for the land, so the residual is $3,400,000 - $2,100,000 = $1,300,000.
Option B: $3,400,000
Option B, $3,400,000, is the gross sellout of 40 x $85,000 before any costs are deducted. Gross retail lot sales are not raw land value; the correct residual is $3,400,000 - $2,100,000 = $1,300,000.
Option C: $2,100,000
Option C, $2,100,000, is the total of non-land costs and entrepreneurial incentive, not the land residual. The land receives what remains after those costs: $3,400,000 - $2,100,000 = $1,300,000.
Sellout minus costs equals land
Think of the land as last in line: lot buyers pay the sellout, the costs and the developer's incentive are paid first, and the land gets the leftover.
How to use: Use this whenever a question gives lot count, lot price and total non-land costs and asks for the land residual.
Exam Tip
Check whether the question says to ignore timing; if it does, a simple subtraction is expected, and if it does not, look for a discounting step.
Common Mistakes to Avoid
- -Reporting gross lot sellout as the land value
- -Adding development costs to the sellout instead of deducting them
- -Treating the total cost figure as the land residual
Concept Deep Dive
Analysis
This question tests the undiscounted subdivision development method for valuing land. First find gross sellout by multiplying the number of lots by the lot price, then subtract all non-land costs and entrepreneurial incentive. Because timing is expressly ignored, no discounting step is needed.
Background Knowledge
The subdivision development method estimates raw land value by projecting the sale prices of finished lots and deducting development, selling and holding costs plus entrepreneurial incentive. A full analysis also models absorption and discounts cash flows for the time value of money; this calculation leaves those steps out.
Real-World Application
A developer asks an appraiser to estimate what a 40-lot tract is worth as raw land. The appraiser projects finished lot prices, deducts site work, marketing, carrying costs and developer profit, and then, in a full report, discounts the cash flows over the expected sellout period.
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