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-or-site-valuation Questions
Under which condition is the land residual technique most applicable?
What is the appraiser's obligation when a site's legal description does not match its apparent physical boundaries?
Why can the same physical parcel carry different values in two assignments?
A site differs from land in that a site is best described as which of the following?
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?
In a land residual analysis for a proposed office development, the appraiser estimates total annual net operating income (NOI) will be $1,250,000. The improvement value, derived via the cost approach, is $15,000,000. Market evidence indicates a 7.0% overall capitalization rate is appropriate for similar improved properties. What is the indicated land value?
A developer plans a 36-lot residential subdivision on raw land. Each lot is expected to sell for $85,000. Total development costs (excluding land) are $1,420,000, including $220,000 for entrepreneurial incentive. The developer requires a 12% annual yield on invested capital over a 3-year development period. Using the subdivision development method, what is the maximum price the developer should pay for the land if all lots sell at the projected price and timing?
In applying the land residual technique to a proposed subdivision, an appraiser estimates that the time required to fully absorb all lots will be 6 years. The developer requires a 10% annual yield on invested capital. Which discounting approach is most appropriate for converting future net proceeds to present value?
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