Why is extraction generally considered more reliable than allocation?
Correct Answer
A) Extraction works from a specific sale, not an average
Why this is correct: The extraction method derives land value by subtracting the depreciated cost of improvements from the sale price of an improved property. It is based on a specific, actual transaction, making it more reliable than allocation, which applies a general land-to-total-value ratio derived from market averages. Why the other choices are wrong: Both extraction and allocation require an estimate of accrued depreciation. Allocation can be used on residential property. Allocation does not require sales of vacant land; it uses ratios from improved property sales. Exam tip: Extraction is property-specific; allocation is market-wide. Specific data is generally more reliable.
Why This Is the Correct Answer
Extraction derives land value from a specific improved sale's own residual, while allocation applies a typical ratio that may not describe a particular site.
Why the Other Options Are Wrong
Option B: Extraction needs no estimate of accrued depreciation
Extraction depends entirely on estimating accrued depreciation, which is its principal weakness rather than something it avoids.
Option C: Allocation may only be used on commercial property
Allocation is applied to residential and commercial property alike. No property type restriction exists.
Option D: Allocation requires sales of vacant land to be found
Neither method requires vacant land sales. Both exist precisely because such sales are unavailable.
One Sale Versus a Typical Ratio
One Sale Versus a Typical Ratio. Extraction knows the actual property; allocation knows the average one.
How to use: Prefer extraction where a comparable improved sale exists, and reconcile several extractions rather than relying on one.
Exam Tip
Extraction is least reliable where improvements dominate value, since depreciation error passes straight into the land figure.
Common Mistakes to Avoid
- -Believing extraction avoids the depreciation estimate
- -Applying allocation to an atypical site
- -Relying on a single extraction rather than reconciling several
Concept Deep Dive
Analysis
Both methods estimate land value indirectly where vacant land sales are unavailable, and they differ in how much of the answer comes from the specific property. Extraction works from an individual improved sale: take that sale's price, subtract the depreciated value of its improvements, and the residual is that property's land value — an estimate grounded in one actual transaction with its own actual land. Allocation applies a land-to-total-value ratio derived from analysing a group of sales, so the result reflects a typical relationship in the market rather than anything specific to the subject's site. Where a site is unusual — larger, better located, differently shaped — a typical ratio will not describe it. Extraction has its own weakness, since any error in the depreciation estimate transfers dollar for dollar into the land residual, which is why it is least reliable where improvements dominate value. Both remain secondary to direct comparison of vacant land sales where those exist.
Background Knowledge
Extraction deducts depreciated improvement value from an improved sale price to leave a land residual. Allocation applies a market-derived land-to-value ratio. Both are secondary to direct comparison of vacant land sales.
Real-World Application
An appraiser with no vacant land sales extracts land value from five improved sales in the subdivision, reconciles the residuals, and uses allocation only as a check.
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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