Extraction Has No Traction
“Land values were based upon the extraction method.”
Look familiar?
If I had a nickel for every phoned-in Cost Approach that had this sentence or one like it, I’d be Warren Buffet.
The Dictionary of Real Estate Appraisal defines it as:
A method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land; most effective when the improvements contribute little to the total sale price of the property.
The underscored portion says it all. Usually this technique is used in rural settings. Perhaps when appraising some hunting shack on a couple of hundred acres of scrub. But no, we see it in the middle of suburban Hinsdale, Belleville, Taylorville, and other places where the residence is easily a significant portion of the total value.
By definition, extraction doesn’t really work in cities and suburbs where improvements tend to drive value. Also, some Cost Approaches are so poorly cobbled together that we seriously doubt the appraiser’s ability to extract anything.
Don’t just toss extraction into a report. If you cannot demonstrate an ability to depreciate reasonably, then you certainly won’t be able to support an extraction application.
The board strongly suggests that you find a course that teaches a more reliable technique.
- Hybrid Assignments, the Consequences - February 7, 2019
- Bankers Concerned About Appraisals - October 18, 2017
- Third Party Blues - July 19, 2017
Most of the time this is not even backed up by listing the sales it was extracted from, hmm.
Amen. I’ve been thinking this alot, thanks for writing it.
Unfortunate letter AND assumptions by the Illinois Board. They assumed their definition is complete and that it is literal. “Most effective” does not mean “only effective”.
In Los Angeles it is relatively rare to be able to find comparable sites that have recently old. Not always impossible, but usually so.
I ALWAYS have the calculations used to derive value by extraction in my work file and can give the specifics anytime required. I also identify the specific improved comparables used to develop it.
I make my own estimates of accrued depreciation, which I ALSO cross check with assessors records for the improvements contribution as a percentage of a specific assessed valuation and dollar amount. (Yes, I take Prop 13 into account-in many cases it actually makes it EASIER).
Just because it (extraction) is abused so often does not make it less valid. If THAT were the measurement of an approaches validity, then “paired sales” would have been outlawed years ago.
Perhaps they would prefer the largely hypothetical, assumption based, Land Development Approach / Technique?
Instead of suggesting unspecified alternatives, they’d be better off reminding appraisers that LYING in an appraisal report is a license violation.
With any luck, no one in decision making positions affecting us will take their article and conclusion too seriously.