ARTICLE SOURCE: Vol. 4, Issue 1, January 2012 of the Illinois Appraiser newsletter from the Illinois Department of Financial and Professional Regulation.
“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 [the Extraction Method] 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.
ARTICLE SOURCE: Vol. 4, Issue 1, January 2012 of the Illinois Appraiser newsletter from the Illinois Department of Financial and Professional Regulation.
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