At the same effective date, reliable value indications support $800,000 for continued use of a property as improved and $500,000 for its cleared site. Immediate demolition costs $100,000. These are the only feasible alternatives, with no other costs or timing differences. Which alternative has the higher net value?
Correct Answer
C) Keep the improvements: $800,000 exceeds $400,000 after demolition
Under these two alternatives, continued as-is value is $800,000. Immediate clearing for sale gives $500,000 − $100,000 = $400,000. Retaining is preferable among these two alternatives. Do not add a completed new building value to a land value that already reflects development potential.
Why This Is the Correct Answer
Option C is correct because continued use is worth $800,000, while clearing the site yields $500,000 − $100,000 = $400,000. Since $800,000 exceeds $400,000, keeping the improvements produces the higher net value under the stated assumptions.
Why the Other Options Are Wrong
Option A: Neither of the two alternatives has any positive value at all
Option A says neither alternative has any positive value. Both have positive values: $800,000 for continued use and $400,000 net for the cleared site.
Option B: The two alternatives have exactly equal net value at that date
Option B says the two alternatives have exactly equal net value. They do not: continued use is $800,000 and the cleared site nets $500,000 − $100,000 = $400,000.
Option D: Demolish immediately, because the $500,000 site exceeds $800,000
Option D recommends immediate demolition, claiming the $500,000 site exceeds $800,000. That is false: $500,000 is less than $800,000, and after the $100,000 demolition cost the site nets only $400,000.
Keep it if it's worth more
Compare the property as it stands with the cleared land minus the cost of clearing; the larger number wins.
How to use: Use this when deciding between continuing the current use and demolishing.
Exam Tip
Subtract demolition costs from the cleared-site value before comparing it with the improved value.
Common Mistakes to Avoid
- -Ignoring demolition costs in the comparison
- -Assuming land value as vacant is higher simply because the building is old
- -Adding a new building's value to a land value that already reflects development potential
Concept Deep Dive
Analysis
This question tests whether existing improvements should be kept or removed. Compare the value as improved with the value of the cleared site after demolition costs. Demolition makes economic sense when the land as if vacant, net of clearing costs, exceeds the value of the improved property.
Background Knowledge
Highest and best use of an improved property considers whether to keep, modify or demolish the existing improvements. Demolition is economically appropriate when land value as if vacant exceeds the current value of the improved property, with demolition costs taken into account. When the improved value is higher, the improvements still contribute value.
Real-World Application
An owner asks whether to tear down an older house to sell the land. The appraiser finds the property as improved is worth $800,000, while the cleared site would sell for $500,000 less $100,000 of demolition, so continued use is the better choice for now.
More Land/Site Questions
Market analysis confirms that seller financing at 3%, versus a 6% market rate, increased a comparable sale price. What adjustment removes that financing premium?
Other relevant conditions equal, growth in the number of households with effective purchasing power in a market tends to have which effect?
In a lakefront market, paired sales show that direct water frontage has the largest price effect of any feature. Which approach to comparable selection best follows from this evidence?
Which circumstance can cause highest and best use as improved to differ from highest and best use as though vacant?
A small group of buyers in a market looks for specialized features that are uncommon in the broader housing supply. What term describes this group?
A neighborhood analysis should include all of the following EXCEPT:
A site legally permits at most 40 units and can physically support 50. Supported comparable analyses find 30 and 40 units financially feasible, with 40 units producing the highest net land value after costs, timing and required return. Which use is maximally productive among these alternatives?
Market evidence isolates a subject value loss from off-site landfill odors. Which listed cause is an external-obsolescence influence?
Which proposed use cannot pass the legal-permissibility screen without evidence that the necessary permission is reasonably probable?
In the neighborhood life cycle, which stage is marked by relatively stable values and little new construction?