Allocation Verse Extraction

[Justin Gohn]

Can someone give me a easy-to-understand explanation of the difference between Allocation and Extraction?

Thanks.

 

[Chris Harrison]

As per "Appraising Residential Properties" 3rd edition

Allocation: a method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of site value to total property value and this ratio is applied to the property being appraised or the comparable being analyzed.

Extraction: a method of estimating land value in which the depreciated cost of the improvement 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.

 

[Justin Gohn]

Thanks Chris.

But I have "The Dictionary of Real Estate Appraisal, 4th Edition" sitting here on my desk and it gives the same definition.

I guess I was looking for a more layman's explanation, if possible. Or perhaps a real life example of each.

Extraction seems easy to understand, but Allocation is a little more convoluted.

 

[The Warrior Monk]

Thanks Chris.

Extraction seems easy to understand, but Allocation is a little more convoluted.

Allocation is basically an Land-to-Value Ratio. It works very well if you're in a cookie-cutter neighborhood.

 

[Christine Marie]

Extraction For Land Values (

1 2 3) dated 11/14/2005 in the urgent section.... hope this bone i dug up for you helps

 

[CANative]

Allocation only works well (and I would argue the point of characterizing this method as "working well" even in the best of conditions) in cookie cutter neighborhoods where there have been some sales of improved and unimproved lots so that you can develop a lot value ratio. And if that's the case then the method is kind of redundant. But if you can find a few lot and improved sales in a similar neighborhood you might get a suggestion of a ratio. Sometimes this may be a good argument for averaging.when a direct comparative analysis is not possible.

 

[Justin Gohn]

Thanks everyone!!

 

[Mike Garrett RAA]

Think of it this way.

If you do a cost approach, and do it well, you can come up with the replacement value of the improvements. When you subtract that value from the sales price you get the site value. This would be an extraction.

If you this many times, you eventually develop an improvement to site value ratio (percentage), say 30% or 35%, or what ever. Now if you apply that ratio (percentage) to determine a site value, you have used the allocation method.

Quite often, in mass appraisal, an assessor will use the allocation method to determine land value, especially if the land is taxed at one rate and improvements at another.

The best method, for a residential appraiser, would be the direct sales method. This is where there are known sales of vacant land (sites). Unfortunately, in older fully developed neighborhoods those sales might not exist.

I am a proponent of appraisers learning the cost approach so that they can "extract" out the site value. More and more lenders are asking us to complete the cost approach on the new Fannie Mae form even though Fannie says it is not required.

 

[Richard Carlsen]

Extraction is, in essence, a reverse Cost Approach where everything that is an improvement or depreciation is costed out of the sales price to find what the contributory value is of the land. And it works. The more examples you have, the better. We use it for waterfront properties. Look for the sales with the smallest or least improvements (less to extract) you can find and work the CA backward. Five or six sales should give a very strong indicator of land contributory value.

Allocation works best and most accurately where there are large numbers of similar size lots with at least a modicum of conformity in the neighborhood. For instances, we have one sub of about 80 houses where there have been no unimproved lot sales for the past 6-7 years but based on extraction of improved sales, we are been able to say over that period of time, the site value is between 14 and 18 percent of the selling price. Now when we get a comp from this sub, we typically can allocate 15%+- of the sales price to the site value, depending on the quality and location of the lot in the sub, based on our data. No other proof is needed.