What is the principal limitation of the land residual technique?

Correct Answer

C) Small errors in the inputs move the residual a lot

Why this is correct: The land residual technique calculates land value as a remainder: Land Value = (Net Operating Income - Income Attributable to Building) / Land Capitalization Rate. Small errors in the large input numbers (NOI, building value, rates) are magnified in the final, smaller residual figure, making the result highly sensitive. Why the other choices are wrong: "It cannot be applied to income-producing property" is false; it is specifically for income properties. "It requires sales of comparable vacant parcels" describes the sales comparison method, not the residual technique. "It may only be used where a ground lease exists" describes ground rent capitalization. Exam tip: Residual techniques are sensitive; they are supporting tools, not primary methods.