What does the land residual technique assume about the improvements on the site?
Correct Answer
A) That they are new and represent highest and best use
Why this is correct: The land residual technique is a development method that estimates land value by deducting the cost of a new improvement (including profit) from the projected value of the completed property. It assumes the improvement is new and represents the highest and best use of the site. Why the other choices are wrong: The technique does not assume improvements contribute nothing to income; they are the source of the income. It does not assume demolition within a few years. It does not assume value equals original cost; it uses current cost and value. Exam tip: Residual techniques are forward-looking and assume optimal development. They are sensitive to the accuracy of income, cost, and rate estimates.
Why This Is the Correct Answer
Why this is correct: The land residual technique is a development method that estimates land value by deducting the cost of a new improvement (including profit) from the projected value of the completed property. It assumes the improvement is new and represents the highest and best use of the site. Why the other choices are wrong: The technique does not assume improvements contribute nothing to income; they are the source of the income. It does not assume demolition within a few years. It does not assume value equals original cost; it uses current cost and value. Exam tip: Residual techniques are forward-looking and assume optimal development. They are sensitive to the accuracy of income, cost, and rate estimates.
More land-or-site-valuation Questions
Under which condition is the land residual technique most applicable?
What is the appraiser's obligation when a site's legal description does not match its apparent physical boundaries?
Why can the same physical parcel carry different values in two assignments?
A site differs from land in that a site is best described as which of the following?
In a built-up area where no vacant land has sold for years, which approach to site value is the usual fallback?
How is entrepreneurial profit treated in the subdivision development method?
A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
In a land residual analysis for a proposed office development, the appraiser estimates total annual net operating income (NOI) will be $1,250,000. The improvement value, derived via the cost approach, is $15,000,000. Market evidence indicates a 7.0% overall capitalization rate is appropriate for similar improved properties. What is the indicated land value?
A developer plans a 36-lot residential subdivision on raw land. Each lot is expected to sell for $85,000. Total development costs (excluding land) are $1,420,000, including $220,000 for entrepreneurial incentive. The developer requires a 12% annual yield on invested capital over a 3-year development period. Using the subdivision development method, what is the maximum price the developer should pay for the land if all lots sell at the projected price and timing?
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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