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
Why this is correct: The extraction method derives land value by working backward from the sale price of an improved property. The steps are: 1) Estimate the reproduction or replacement cost new of the improvements. 2) Estimate and subtract all forms of depreciation (physical, functional, external). 3) Subtract this depreciated improvement value from the total sale price. The remainder is the estimated land value. Why the other choices are wrong: "The allocation method" is wrong; it uses a ratio of land value to total property value derived from market data. "The extraction method" is correct. "The land residual method" is wrong; it is an income capitalization technique that isolates the income attributable to land. "The development method" is wrong; it values land based on the projected net proceeds from developing and selling it. Exam tip: Extraction = Sale Price - Depreciated Improvement Cost. It's a backward calculation.
Why This Is the Correct Answer
Why this is correct: The extraction method derives land value by working backward from the sale price of an improved property. The steps are: 1) Estimate the reproduction or replacement cost new of the improvements. 2) Estimate and subtract all forms of depreciation (physical, functional, external). 3) Subtract this depreciated improvement value from the total sale price. The remainder is the estimated land value. Why the other choices are wrong: "The allocation method" is wrong; it uses a ratio of land value to total property value derived from market data. "The extraction method" is correct. "The land residual method" is wrong; it is an income capitalization technique that isolates the income attributable to land. "The development method" is wrong; it values land based on the projected net proceeds from developing and selling it. Exam tip: Extraction = Sale Price - Depreciated Improvement Cost. It's a backward calculation.
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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