Land value may be indicated by extraction (residual): improved sale price minus depreciated improvement cost (RCNLD). Separately, allocation applies a market-supported land-to-total-value ratio to the improved sale. An improved sale closed at $1,450,000. Supported RCNLD of the improvements is $1,050,000. A market land-allocation ratio of 24% is also supported. Which statement correctly contrasts the two land indications?
Correct Answer
A) Allocation $348,000; extraction $400,000.
Allocation gives $1,450,000 × 24% = $348,000. Extraction gives $1,450,000 − $1,050,000 = $400,000. The two methods use different evidence and need not coincide; reconcile reliability instead of forcing equality. The complete pair, rather than a truncated single method result, is the answer.
Why This Is the Correct Answer
Option A is correct because allocation gives $1,450,000 × 24% = $348,000 and extraction gives $1,450,000 − $1,050,000 = $400,000. The methods use different evidence, so their results differ and are reconciled. This option labels both figures correctly.
Why the Other Options Are Wrong
Option B: Allocation $400,000; extraction $348,000.
Option B, allocation $400,000 and extraction $348,000, swaps the two results. Allocation is $1,450,000 × 24% = $348,000, and extraction is $1,450,000 − $1,050,000 = $400,000.
Option C: Allocation $1,102,000; extraction $1,050,000.
Option C, allocation $1,102,000 and extraction $1,050,000, reports improvement figures rather than land. $1,102,000 is $1,450,000 × 76%, the improvement share, and $1,050,000 is the RCNLD itself; the land indications are $348,000 and $400,000.
Option D: Allocation $348,000; extraction $2,500,000.
Option D gives allocation $348,000 correctly but extraction $2,500,000, which adds the RCNLD to the price: $1,450,000 + $1,050,000. Extraction subtracts it, giving $400,000.
Allocate multiplies, extract subtracts
Allocation takes a percentage share of the sale price. Extraction removes the depreciated building value from the sale price.
How to use: Use this to match each method to its figure before reading the options.
Exam Tip
Watch for options that swap correct numbers between methods or that report the improvement portion instead of land.
Common Mistakes to Avoid
- -Labeling the extraction result as the allocation result
- -Using the improvement ratio instead of the land ratio
- -Forcing the two methods to agree
Concept Deep Dive
Analysis
This question tests computing and labeling land indications by allocation and extraction from the same improved sale. Allocation applies the 24% land ratio to the price, and extraction subtracts the RCNLD from the price. The correct option must match each figure to its method.
Background Knowledge
Allocation estimates land value as a supported percentage of total property value. Extraction estimates land value as total property value minus the contribution of the improvements, often measured by depreciated cost. Each method's reliability depends on how well its ratio or cost estimate is supported.
Real-World Application
An appraiser valuing a lot in an older neighborhood uses a recent house sale. A local land ratio and a supported depreciated cost estimate give two land indications, which the appraiser reconciles based on the quality of each input.
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Previous Question
Land value may be indicated by extraction (residual): improved sale price minus depreciated improvement cost (RCNLD). Separately, allocation applies a market-supported land-to-total-value ratio to the improved sale. An improved sale closed at $1,580,000. Supported RCNLD of the improvements is $1,120,000. A market land-allocation ratio of 26% is also supported. Which statement correctly contrasts the two land indications from this sale?
Next Question
For a vacant site, an office use would be worth $2,400,000 when complete and cost $1,950,000 to produce, including entrepreneurial incentive. A retail use would be worth $1,800,000 and cost $1,450,000. Which use and land value does this test support?