What is the principal weakness of the allocation method?
Correct Answer
B) The typical ratio may not fit the subject property
Why this is correct: The principal weakness of the allocation method is that the typical land-to-value ratio derived from the market may not fit the subject property. The method applies a market-extracted average ratio to the subject's total value. However, individual properties often deviate from the average due to unique characteristics like lot size, building size, or location. Applying an average ratio to an atypical property produces an unreliable land value estimate. Why the other choices are wrong: "It requires many recent sales of vacant parcels" describes the sales comparison approach for land. "It cannot be applied to residential property at all" is false; allocation is commonly used for residential properties. "It depends on a ground lease already being in place" describes the ground rent capitalization method. Exam tip: Allocation provides a quick check, but its result is only reliable if the subject property is typical of the market from which the ratio was derived.
Why This Is the Correct Answer
Why this is correct: The principal weakness of the allocation method is that the typical land-to-value ratio derived from the market may not fit the subject property. The method applies a market-extracted average ratio to the subject's total value. However, individual properties often deviate from the average due to unique characteristics like lot size, building size, or location. Applying an average ratio to an atypical property produces an unreliable land value estimate. Why the other choices are wrong: "It requires many recent sales of vacant parcels" describes the sales comparison approach for land. "It cannot be applied to residential property at all" is false; allocation is commonly used for residential properties. "It depends on a ground lease already being in place" describes the ground rent capitalization method. Exam tip: Allocation provides a quick check, but its result is only reliable if the subject property is typical of the market from which the ratio was derived.
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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