In an extraction calculation, supported improvement contribution is a large share of the total price, leaving a small land remainder. Why can the land indication be sensitive to estimation error?
Correct Answer
B) The land share is small, so errors distort it heavily
Extraction subtracts improvement contribution from an improved sale. When the land remainder is small, a given error in the larger improvement estimate can be a large percentage of that remainder. Reliability depends on actual input quality, not simply whether the building is old or new.
Why This Is the Correct Answer
Option B is correct because land is the small remainder after subtracting a large improvement estimate. A modest percentage error in the improvement contribution translates into a much larger percentage error in the land indication. For example, the same dollar error is a larger share of a small figure than of a large one.
Why the Other Options Are Wrong
Option A: New buildings cannot have their cost estimated at all
Option A claims new buildings cannot have their cost estimated at all, which is false. Cost for new buildings is often estimated readily, and the sensitivity issue comes from the small size of the remainder, not from any impossibility of estimating cost.
Option C: Extraction may not be applied to residential property
Option C says extraction may not be applied to residential property, which is incorrect. Extraction is a recognized land valuation technique that can be used for residential properties when supported data exist.
Option D: Depreciation must be zero, which the method forbids
Option D says depreciation must be zero, which the method forbids. Extraction subtracts the depreciated improvement contribution, so depreciation is part of the method rather than something that must be zero.
Small remainder, big swing
Subtracting a big uncertain number leaves a small fragile one. The smaller the land leftover, the more an error shakes it.
How to use: Use this when judging how reliable an extraction or residual result is.
Exam Tip
When a method leaves a small residual after subtracting a large estimate, expect the residual to be sensitive to errors in that estimate.
Common Mistakes to Avoid
- -Assuming extraction is equally reliable regardless of the land share
- -Believing extraction cannot be used for residential property
- -Thinking depreciation must be ignored in extraction
Concept Deep Dive
Analysis
This question tests the sensitivity of the extraction method. Extraction subtracts the improvement contribution from a sale price, leaving land as the remainder. When the improvement contribution is large and the land remainder small, an error in the larger number becomes a big percentage of the small result.
Background Knowledge
Extraction estimates land value by subtracting the contribution of the improvements from the total sale price of an improved property. Its reliability depends on how well the improvement contribution is supported. Results are most reliable when the improvement contribution is small relative to the price or can be estimated accurately.
Real-World Application
An appraiser tries extraction on a large new house on a small lot, where improvements make up most of the price. A 5% swing in the improvement estimate would change the land indication by a much larger percentage, so she gives the extraction result limited weight and relies more on vacant land sales.
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