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?
Correct Answer
D) $105,000
Why this is correct: The allocation method applies a market-derived land-to-total-value ratio to a property. First, find the ratio from market data: $80,000 (lot value) ÷ $400,000 (improved value) = 0.20 or 20%. Then apply that ratio to the subject: 20% × $525,000 (subject sale price) = $105,000 estimated site value. Why the other choices are wrong: "$80,000" is the lot value from the subdivision, not adjusted for the subject. "$120,000" might come from a different ratio (e.g., $80,000/$400,000 = 0.1667, incorrectly rounded). "$131,250" incorrectly reverses the ratio (assumes land is 25% of total). Exam tip: Allocation: (Lot Value / Improved Value) × Subject Value = Estimated Subject Lot Value.
Why This Is the Correct Answer
Why this is correct: The allocation method applies a market-derived land-to-total-value ratio to a property. First, find the ratio from market data: $80,000 (lot value) ÷ $400,000 (improved value) = 0.20 or 20%. Then apply that ratio to the subject: 20% × $525,000 (subject sale price) = $105,000 estimated site value. Why the other choices are wrong: "$80,000" is the lot value from the subdivision, not adjusted for the subject. "$120,000" might come from a different ratio (e.g., $80,000/$400,000 = 0.1667, incorrectly rounded). "$131,250" incorrectly reverses the ratio (assumes land is 25% of total). Exam tip: Allocation: (Lot Value / Improved Value) × Subject Value = Estimated Subject Lot Value.
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How is entrepreneurial profit treated in the subdivision development method?
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In applying the land residual technique to a proposed subdivision, an appraiser estimates that the time required to fully absorb all lots will be 6 years. The developer requires a 10% annual yield on invested capital. Which discounting approach is most appropriate for converting future net proceeds to present value?
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