An improved property sold for a cash-equivalent $720,000. Supported current replacement cost new of its improvements is $800,000 and accrued depreciation is $200,000. Using extraction, what site value is indicated?
Correct Answer
B) $120,000
Depreciated improvement cost is $800,000 − $200,000 = $600,000. Subtract that supported contribution from the $720,000 improved sale price: the indicated site value is $120,000. Do not subtract depreciation alone, use undepreciated cost or substitute an unrelated land estimate.
Why This Is the Correct Answer
Option B is correct because the depreciated improvement cost is $800,000 - $200,000 = $600,000, and subtracting it from the $720,000 sale price leaves $720,000 - $600,000 = $120,000 for the site. Extraction estimates site value by subtracting the value contribution of improvements from total property value. Using depreciated cost rather than cost new is essential.
Why the Other Options Are Wrong
Option A: $520,000
Option A, $520,000, subtracts only the accrued depreciation from the sale price: $720,000 - $200,000. Extraction subtracts the depreciated improvement contribution, $800,000 - $200,000 = $600,000, leaving $120,000.
Option C: $600,000
Option C, $600,000, is the depreciated improvement cost ($800,000 - $200,000), not the site value. That figure must be subtracted from the $720,000 sale price, leaving $120,000 for the site.
Option D: $1,320,000
Option D, $1,320,000, adds the depreciated improvement cost to the sale price ($720,000 + $600,000) instead of subtracting it. Site value by extraction is $720,000 - $600,000 = $120,000.
Price minus depreciated building
Extraction is the cost approach run backward: sale price - (cost new - depreciation) = site.
How to use: Use this whenever a question gives an improved sale price, cost new and depreciation and asks for site value.
Exam Tip
Compute the depreciated improvement value first, then subtract it from the sale price; a site value larger than the sale price signals an addition error.
Common Mistakes to Avoid
- -Subtracting cost new instead of depreciated cost
- -Subtracting only the depreciation from the sale price
- -Reporting the depreciated improvement cost as the site value
Concept Deep Dive
Analysis
This question tests the extraction method of site valuation. The site value is what remains after subtracting the depreciated contribution of the improvements from the improved sale price. The key step is to subtract depreciation from cost new first.
Background Knowledge
Extraction is used when improvements contribute relatively little to value or when depreciation can be reliably estimated, such as in rural areas with few vacant land sales. It is a variant of the cost approach logic applied in reverse to a sale.
Real-World Application
In a rural county with almost no vacant land sales, an appraiser studies an older farmhouse sale. By estimating the depreciated cost of the house and outbuildings and subtracting it from the sale price, the appraiser extracts an indication of site value.
More Land/Site Questions
An undamaged but functionally inadequate system causes a supported $60,000 loss. Replacement costs $85,000 and restores only $60,000, with no other benefits. What loss classification and deduction fit?
The subject is a 10-year-old dwelling with improvement cost new of $640,000. A highly comparable 7-year-old dwelling recently sold for $580,000; at the sale date its site was worth $150,000 and its improvement cost new was $500,000. Market evidence shows depreciation accruing evenly with actual age. What is the depreciated value of the subject improvements?
Observed sale prices are $450,000, $475,000, $425,000, $500,000, $440,000. Calculate the range (maximum−minimum), to the nearest dollar.
Observed values are 100, 105, 110, 115, 120. Calculate the range (maximum−minimum).
For an arithmetic illustration only, depreciate a historical $2,000,000 construction cost on a zero-salvage straight-line 40-year schedule for 10 years. What unindexed scheduled amount remains? This is not a conclusion of current market value or current replacement cost.
For an arithmetic illustration, allocate historical construction cost $2,400,000 over 40 years on a zero-salvage equal annual schedule. After 8 years, what scheduled unindexed amount remains? This is not a current market-value conclusion.
For an arithmetic schedule only, allocate historical cost $2,500,000 over 40 years with zero residual. After 8 years, what unindexed scheduled amount remains? This is not an estimate of current market value.
The sale-price range is $45,000 and the maximum is $385,000. Find the minimum price.
A property is purchased for $1,500,000 with a loan of $1,200,000. Using the purchase price as the value, what is the loan-to-value ratio, as a percentage to one decimal?
Improvement cost new is $1,800,000. Separately supported improvement depreciation deductions of $200,000, $150,000, $100,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
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