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.
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A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
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Previous Question
An improved property sold for $480,000. The improvements have a replacement cost new of $360,000 and have suffered 25 percent accrued depreciation. Using extraction, what is the indicated land value?
Next Question
An appraiser is valuing undeveloped land intended for a 40-lot subdivision. Market data indicates strong demand, but the only nearby comparable subdivision sold out in 3 years with steady monthly absorption. The subject site is larger, topographically constrained, and lacks existing infrastructure. Which factor most critically affects the reliability of using the comparable’s absorption rate in the subject’s land residual analysis?