Which site valuation method estimates land value by subtracting the depreciated cost of the improvements from the total sale price of an improved property?
Correct Answer
B) The extraction method
Extraction estimates land contribution by deducting supported depreciated improvement contribution from a compatible improved-property sale price. Allocation applies a supported land-to-total ratio. Income land residual instead deducts building income from NOI and capitalizes the remaining land income.
Why This Is the Correct Answer
Option B is correct because the extraction method estimates land value by deducting the contributory value of the improvements from the sale price or total property value. What remains after that deduction is attributed to the land. This matches the procedure described in the question.
Why the Other Options Are Wrong
Option A: The allocation method
Option A, the allocation method, is wrong because allocation applies a supported land-to-total ratio to total value rather than subtracting depreciated improvement cost.
Option C: The land residual method
Option C, the land residual method, is wrong because it works with income: it deducts the income attributable to the building from net operating income and capitalizes the remaining land income.
Option D: The development method
Option D, the development method, is wrong because it projects the proceeds from developing and selling lots or improvements, deducts development costs and discounts the result, rather than subtracting improvement cost from a single improved sale.
Extract subtracts, allocate multiplies
Extraction subtracts the building from the price; allocation multiplies total value by a land ratio.
How to use: Use this contrast to tell the two most commonly confused land methods apart.
Exam Tip
Focus on the operation described: subtraction of improvement cost points to extraction, a ratio points to allocation, and capitalized income points to land residual.
Common Mistakes to Avoid
- -Confusing extraction with allocation
- -Confusing extraction with the income land residual technique
Concept Deep Dive
Analysis
This question tests recognition of the land valuation methods by their procedures. Subtracting the depreciated improvement contribution from an improved sale price defines extraction. Distinguishing it from allocation, land residual and the development method is the key.
Background Knowledge
Common land valuation methods include sales comparison, allocation, extraction, subdivision development, land residual and ground rent capitalization. Each uses a different starting point and procedure. Extraction starts from an improved sale price and removes the improvements' contribution.
Real-World Application
In an older neighborhood with no vacant lot sales, an appraiser takes the sale price of a dated home and deducts the estimated depreciated value of the house to estimate what the lot alone is worth.
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Previous Question
An improved property sold for $480,000. Current replacement cost new of its improvements is $360,000, with accrued depreciation of 25% of cost new. Using extraction and no other adjustments, what land value is indicated?
Next Question
In comparable neighborhoods, the typical ratio of land value to total property value is 0.24 (24%). The subject's improved property value indication is $875,000. What site (land) value is indicated by allocation?