An appraiser is extracting depreciation from a comparable dwelling that was listed at $410,000 and sold for $395,000 in a cash transaction. The price included $15,000 of furniture conveyed with the house. At the sale date, site value was $105,000 and improvement cost new was $340,000. What are the improvement contribution and the total depreciation?
Correct Answer
A) Contribution $275,000; depreciation $65,000
Non-real-property items are removed before extraction, so the real property price is $395,000 − $15,000 = $380,000. Subtracting the $105,000 site leaves a $275,000 contribution, and $340,000 − $275,000 = $65,000 of depreciation. Ignoring the furniture gives option b, removing it twice gives option c, and starting from the $410,000 list price gives option d.
Why This Is the Correct Answer
Option A is correct because the $15,000 of furniture is not real property, leaving $380,000. Deducting the $105,000 site gives a $275,000 contribution. Comparing that with $340,000 cost new gives $65,000 of depreciation.
Why the Other Options Are Wrong
Option B: Contribution $290,000; depreciation $50,000
Option B shows a $290,000 contribution and $50,000 of depreciation, from 395,000 − 105,000 and 340,000 − 290,000. It leaves the $15,000 of furniture in the improvements, so it understates the depreciation of $65,000.
Option C: Contribution $260,000; depreciation $80,000
Option C shows a $260,000 contribution and $80,000 of depreciation, from 395,000 − 30,000 − 105,000. It removes the $15,000 twice; removing it once gives $275,000 and $65,000.
Option D: Contribution $305,000; depreciation $35,000
Option D shows a $305,000 contribution and $35,000 of depreciation, from 410,000 − 105,000. It starts from the list price, not the sale price, and leaves the furniture in; the $380,000 real property price gives $275,000 and $65,000.
Clean the price first
Strip out anything that is not real property, and then subtract the site. The order prevents furniture from being counted as building value.
How to use: Use this when a comparable's price includes furnishings, equipment or other items and depreciation is being extracted.
Exam Tip
Scan the facts for items conveyed with the property before you subtract the site. Each included dollar otherwise inflates the contribution and shrinks the depreciation.
Common Mistakes to Avoid
- -Extracting depreciation from an unadjusted price that includes furniture
- -Starting from the list price instead of the sale price
- -Removing a non-real-property item more than once
Concept Deep Dive
Analysis
This tests the step that comes before the extraction subtraction. A sale price that includes items other than real property overstates what buyers paid for land and improvements. Remove those items first, and then split the real property price between site and improvements. The list price plays no part, because the extraction starts from what the property actually sold for.
Background Knowledge
Market extraction relies on sales adjusted for property rights conveyed, financing and non-real-property items, because the residual should reflect real property alone. Adjustments for physical and locational differences are not made in this step, since those factors are among the sources of depreciation being measured.
Real-World Application
An appraiser verifying a resort-area sale learns that the price included furniture. Before extracting depreciation, the appraiser deducts the supported value of those items from the price. The extracted loss then reflects the real property that was conveyed.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
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Which scenario most strongly supports giving the cost approach substantial weight?
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An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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