Why is the subdivision development method sometimes described as a test of feasibility rather than a valuation method?
Correct Answer
C) It shows whether development pays at a given land price
Why this is correct: The subdivision development method estimates land value by deducting all development costs and developer profit from projected sales revenue. It tests feasibility by showing whether a project is profitable at a given land cost, or alternatively, calculates the residual land value. Why the other choices are wrong: It cannot produce a value indication is false; it does yield a residual land value. It applies only where a plat has been recorded is incorrect; it's used for proposed developments. It requires the land price to be known in advance is not true; it can solve for land price. Exam tip: This method answers both feasibility and value questions via residual calculation.
Why This Is the Correct Answer
Why this is correct: The subdivision development method estimates land value by deducting all development costs and developer profit from projected sales revenue. It tests feasibility by showing whether a project is profitable at a given land cost, or alternatively, calculates the residual land value. Why the other choices are wrong: It cannot produce a value indication is false; it does yield a residual land value. It applies only where a plat has been recorded is incorrect; it's used for proposed developments. It requires the land price to be known in advance is not true; it can solve for land price. Exam tip: This method answers both feasibility and value questions via residual calculation.
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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