Vacant lots in a subdivision sell for about $80,000 while finished homes there sell for about $400,000. Applying that relationship to a subject home that sold for $525,000, what site value does allocation indicate? Assume the stated land ratio is market-supported and applicable to the subject.
Correct Answer
B) $105,000
Land ratio = $80,000/$400,000 = 0.20; subject land = $525,000 × 0.20 = $105,000. The indicated value is $105,000. This is the result under the stated inputs, not a universal market ratio or an approval of a proposed development. Common errors: using the vacant-lot price instead of applying the ratio gives $80,000; dividing the lot price by the improvement value instead of the total gives $131,250; reporting the improvement share instead of the site share gives $420,000.
Why This Is the Correct Answer
Option B is correct because the land ratio is $80,000 ÷ $400,000 = 0.20. Applying that market-supported ratio to the subject's $525,000 sale price gives $525,000 × 0.20 = $105,000 as the indicated site value.
Why the Other Options Are Wrong
Option A: $80,000
Option A, $80,000, uses the typical vacant-lot price instead of applying the ratio to the subject. The subject's price differs, so the 20% ratio gives $525,000 × 0.20 = $105,000.
Option C: $131,250
Option C, $131,250, divides the lot price by the improvement value instead of the total: $525,000 × $80,000 ÷ ($400,000 − $80,000) = $131,250. The ratio uses total value, $80,000 ÷ $400,000 = 0.20, giving $105,000.
Option D: $420,000
Option D, $420,000, reports the improvement share instead of the site share: $525,000 × 0.80 = $420,000. The site share is $525,000 × 0.20 = $105,000.
Lot over total, then times
Divide the lot price by the total home price to get the land percentage, then multiply that percentage by the subject's price.
How to use: Use this two-step order whenever an allocation ratio must be built from lot and home prices.
Exam Tip
Build the ratio with total property value in the denominator, not improvement value.
Common Mistakes to Avoid
- -Using the typical lot price as the subject's site value
- -Dividing by improvement value instead of total value
- -Reporting the improvement share as land
Concept Deep Dive
Analysis
This question tests deriving and applying an allocation ratio. You first compute the land-to-total ratio from typical lot and home prices, then apply it to the subject's price. The traps are using the lot price directly or applying the wrong share.
Background Knowledge
Allocation ratios can be derived by comparing typical vacant lot prices with typical improved property prices in the same market. The ratio must be market-supported and applicable to the subject's property type and price level.
Real-World Application
In a newer subdivision, builders sell lots for about $80,000 and finished homes for about $400,000. An appraiser uses that 20% land relationship, supported by local data, to estimate site value for a more expensive home in the same tract.
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Which fact, if supported by competitive-market evidence, most directly supports a unit-price premium for an otherwise comparable site?
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Comparable sales indicate that land accounts for 28% of total property value. An improved property is valued at $1,650,000. What land value does allocation indicate?