A house sold for $465,000; the improvements' depreciated cost is estimated at $340,000. By extraction, the site value indicated is:
Correct Answer
A) $125,000
Why this is correct: The extraction method estimates land value by subtracting the estimated depreciated value of improvements from the total sale price. Calculation: Sale Price ($465,000) minus Depreciated Improvement Value ($340,000) equals Indicated Site Value ($125,000). Why the other choices are wrong: '$805,000 combining the two figures' incorrectly adds the figures instead of subtracting. '$340,000, the improvement figure itself' is the improvement value, not the land value. '$232,500, splitting the sale price evenly' is an arbitrary 50/50 split not supported by the data. Exam tip: Extraction formula: Land Value = Sale Price - Depreciated Cost of Improvements. It's simple subtraction.
Why This Is the Correct Answer
Option A is right because four hundred sixty-five thousand less three hundred forty thousand leaves one hundred twenty-five thousand as the indicated site value. Extraction is a subtraction: sale price minus the depreciated cost of the improvements equals the residual to the land. A credible application repeats that subtraction across several improved sales and reconciles the indications, rather than relying on one. The appraiser should also state the depreciation estimate's basis, since the residual is only as good as that estimate.
Why the Other Options Are Wrong
Option B: $805,000 combining the two figures
Eight hundred five thousand adds the two figures rather than subtracting, which would say the property is worth both its whole sale price and its improvements again. The improvements are already inside the sale price; that is the premise the technique rests on. A residual can never exceed the total it is drawn from.
Option C: $340,000, the improvement figure itself
Three hundred forty thousand is the depreciated cost of the improvements, which is the quantity being removed rather than the answer. Selecting it means the subtraction was set up and then the wrong side reported. Label your figures before computing so the residual and the deduction do not get swapped.
Option D: $232,500, splitting the sale price evenly
Splitting the sale price evenly imposes a fifty-fifty land-to-building ratio that nothing in the data supports. Ratios of that kind belong to the allocation technique, and even there the ratio must be derived from market evidence for comparable properties rather than assumed. Extraction uses an estimated improvement cost, not a ratio.
Extraction pulls the building out
Extraction pulls the building out of the price and leaves the dirt. Price minus depreciated improvements equals land. Allocation does something different - it slices the price by a ratio. One subtracts a cost, the other applies a percentage.
How to use: When a stem gives you a sale price and an improvement cost figure, the technique is extraction and the operation is subtraction. When it gives you a sale price and a percentage, the technique is allocation and the operation is multiplication. Match the given data to the technique before computing.
Exam Tip
Remember that extraction is least reliable where improvements are a large share of value, so an exam item asking when to use it is usually looking for older or minimally improved properties.
Common Mistakes to Avoid
- -Adding the improvement figure instead of subtracting it
- -Reporting the improvement value as the site value
- -Applying an assumed land-to-value ratio and calling it extraction
- -Relying on a single improved sale for the residual
Concept Deep Dive
Analysis
This question tests extraction, one of the site valuation techniques used where vacant land sales are unavailable. The logic runs the cost approach backwards. In an improved sale, the price paid represents the site plus the depreciated contribution of the improvements, so estimating the depreciated cost of the improvements and subtracting it from the price leaves a residual attributable to the site. The technique is at its most reliable where improvements are a small share of total value and their depreciated cost can be estimated tightly - rural properties with modest buildings, older improvements near the end of their economic life. It is at its weakest where improvements dominate, because every error in the depreciation estimate lands entirely on the residual. That sensitivity is why extraction is a fallback rather than a first choice, and why sales comparison of vacant sites remains the preferred method whenever such sales exist.
Background Knowledge
You need the recognized site valuation techniques - sales comparison, extraction, allocation, subdivision development, land residual, and ground rent capitalization - and when each applies. For extraction specifically you need the formula, the sensitivity of the residual to error in the depreciation estimate, and the conditions under which it is most reliable. You should also be able to distinguish extraction from allocation, which applies a market-derived land-to-total ratio rather than an improvement cost estimate.
Real-World Application
In a built-out neighborhood with no vacant lot sales in several years, an appraiser estimates depreciated improvement cost for four recent sales of similar older homes, extracts a site residual from each, finds them clustered between one hundred twenty and one hundred thirty thousand, and concludes site value within that range.
More Land/Site Questions
Under which condition is the land residual technique most applicable?
Why can the same physical parcel carry different values in two assignments?
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?
Why does a developer's required profit rise for a longer subdivision project?
How does holding cost enter the valuation of land bought for future development?
Excess land is best described as land that has which characteristic?
Plottage value arises in which of the following situations?
Which of the following is an off-site improvement rather than a site improvement?
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