How can a subdivision development cash-flow model be used to test feasibility as well as to estimate residual land value?
Correct Answer
C) It shows if development pays at a set land price
The cash-flow model can estimate residual land value or test whether a proposed land price leaves the required return after supported costs, timing and sales. It can therefore inform both feasibility and valuation; it does not require a recorded plat or known land price in every application.
Why This Is the Correct Answer
Option C is correct because the model shows whether development pays at a given land price by testing whether that price leaves the required return after supported costs, timing and sales. If land is not available at a price that permits a profit, development cannot occur. The same model can also be solved for residual land value.
Why the Other Options Are Wrong
Option A: It cannot produce a value indication at all
Option A says the model cannot produce a value indication at all. A development cash-flow model can estimate residual land value, so it does produce a value indication.
Option B: It applies only where a plat has been recorded
Option B says the model applies only where a plat has been recorded. The model can analyze proposed subdivisions, and it does not require a recorded plat in every application.
Option D: It requires the land price to be known in advance
Option D says the model requires the land price to be known in advance. When used to estimate residual land value, land value is the unknown being solved for, so a known land price is not required.
Solve for land or test it
Leave land price blank and the model solves for it; fill it in and the model tells you whether the deal works. One model, two questions.
How to use: Use it to recognize whether a question is about residual value or feasibility.
Exam Tip
Choices that say a method only works in one narrow situation are often wrong. Remember that the land price can be either an input or the output.
Common Mistakes to Avoid
- -Thinking the model only estimates value and cannot test feasibility
- -Assuming a recorded plat is a prerequisite
- -Believing the land price must be known before using the model
Concept Deep Dive
Analysis
This question tests the dual use of a subdivision development cash-flow model. The same model that solves for residual land value can instead take a proposed land price as an input and show whether the project still earns the required return. That makes it a tool for both valuation and feasibility analysis.
Background Knowledge
The subdivision development method projects lot or unit sales, development costs, timing and required profit, then discounts the net cash flows. Solving for what remains for the land gives a residual land value, while inserting a land price tests feasibility. Results depend on supported assumptions about absorption, costs and returns.
Real-World Application
A developer is offered a tract for a specific price and asks whether a planned single-family subdivision would be profitable. The appraiser builds a cash-flow model of lot sales, infrastructure costs and absorption, inserts the offered price, and tests whether the required return is achieved. The same model, solved for land, indicates the maximum supportable price.
More Land/Site Questions
How should an appraiser account for a site's access to public sewer compared with competing sites that require septic systems?
Which fact, if supported by competitive-market evidence, most directly supports a unit-price premium for an otherwise comparable site?
A rectangular site's frontage is doubled while its depth is halved, keeping area constant. What is the likely value effect in a retail district?
A downtown site's zoning height limit is reduced from six stories to three. Buyers in this market had been paying for six-story development potential. What effect on land value is most supportable?
A zoning change increases permitted density from four to eight units per acre. What is the likely effect on site value?
Using the allocation method, market evidence supports a typical land-to-total-property-value ratio of 28% for similar improved properties in the subject’s location. An improved comparable sold for $825,000. What land (site) contribution is indicated by applying that ratio?
An appraiser is valuing a vacant site near a landfill. A similar vacant site that is not affected by the landfill sold for $480,000. Paired land sales indicate that proximity to the landfill lowers site prices by $70,000. No other adjustments apply. What is the indicated value of the subject site?
An appraiser is extracting site value from a $600,000 cash sale. The seller's records show an original construction cost of $250,000 and a depreciated book value of $110,000. The appraiser estimates current replacement cost new at $400,000 and accrued depreciation from all causes at $100,000. What is the indicated site value?
Three parcels assembled under single ownership (standard appraisal guidance assemblage) support separate as-is values of $290,000, $340,000, and $250,000. After assemblage for a higher-utility use, the combined site is valued at $1,050,000. Assemblage costs (demolition, legal, holding, and related) total $55,000. What is the indicated net plottage (plottage increment after assemblage costs)?
A comparable commercial site with 65 front feet sold for a cash-equivalent price of $585,000. Per standard appraisal guidance, sale price per front foot is a vacant-land unit of comparison when frontage is a primary value determinant. The subject site has 72 front feet and is otherwise similar. What indicated land value does the front-foot unit support before other adjustments?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
Three cash-equivalent sales of similar vacant lots indicate $1,200, $1,280, and $1,270 per front foot. The subject lot has 160 front feet. Based on the mean price per front foot, what is the indicated land value?
Next Question
Which item is normally treated as a site improvement rather than a building improvement?