Extraction Method

[Joe Flacco]

I probably use extraction like 50% of the time. Old rowhouse neighborhoods that's all you can do. Close in suburbs you got plenty of tear downs which are site sales. You go further out then you have raw land sales or land sales in various stages of development. The only time I find actual site sales further out is when a land developer bought a larger tract of land and then developed it into sites and sold the sites to individuals or to builders.

 

[gregb]

I would prefer going a Texas mile to use land sales rather than rely on allocation or extraction. Enough properties here are purchased to tear down, thus, its essentially site value galore.

 

[BRCJR]

lol - thanks GregB! This is an excellent dissertation on one way to perform extraction. A LOT more involved than the example from The Appraisal of Real Estate, but nonetheless very defensible. My only caution would be that you be able to understand what you're doing, and what an R2 even is, before trying to employ this. The example from The Appraisal of Real Estate is as follows: "..., assume an appraiser is estimating the value of the land under an aging, deteriorated automobile service garage that was recently sold for $575,000. No vacant lots have been sold in the market area recently. The appraiser estimates the cost of the improvement at $200,000 and total depreciation at 80%, indicating that the depreciated cost of the improvement is $40,000. Deducting $40,000 from the $575,000 sales price, the appraiser obtains a residual land value indication of $535,000 by the extraction technique." Notice that the example from the text is performed using only one property...

how did you determine the 80% ?

 

[alebrewer]

how did you determine the 80% ?

I didn't, BRCJR - that example was directly from The Appraisal of Real Estate, 12th ed. In general, though, there are three ways (that I know of) to determine depreciation - market extraction, age-life, and breakdown...

 

[Artemis Fowl]

Said it would be more entertaining...
At this point I'm not sure what you are trying to accomplish. Perhaps this argument is better presented to the textbook editors rather than working professionals who need to defend their conclusions in real life. Pretty sure they just assumed most people would understand how to apply the tool they presented.

 

[BRCJR]

I didn't, BRCJR - that example was directly from The Appraisal of Real Estate, 12th ed. In general, though, there are three ways (that I know of) to determine depreciation - market extraction, age-life, and breakdown...

Ok, so how would you determine the depreciation %?

 

[alebrewer]

Ok, so how would you determine the depreciation %?

So most appraisers (as I understand) use the age/life method of estimating depreciation. I have developed a tool to help me estimate TEL and effective age. Once you've got that, supporting a depreciation estimate is fairly easy. That said, there are potential pitfalls to using the age/life method - the most important of which, at least in my mind, is the fact that properties do not depreciate in a straight line manner. I also have used the market extraction method, which is basically the other side of what this thread has been discussing - taking one or more sales, subtracting out the estimated site value, and what you're left with is the depreciated value of the improvements. Then you'd estimate the cost new of the improvements, and the difference between the two is the depreciation, which would then be converted to a percentage. I've personally not used the breakdown method, so someone else would have to offer guidance on that method.

 

[alebrewer]

Said it would be more entertaining...
At this point I'm not sure what you are trying to accomplish. Perhaps this argument is better presented to the textbook editors rather than working professionals who need to defend their conclusions in real life. Pretty sure they just assumed most people would understand how to apply the tool they presented.

maybe someone from AI, who has the authority to modify the text, is enjoying this debate and is potentially considering changing the text...

 

[George Hatch]

I use the methodology that M&S cites in the directions to the use of their economic lifespan estimates and their Depreciation tables. Where it's Remaining Economic Life that the appraiser estimates, not Effective Age.

Economic Life
- Remaining Economic Life (specific to that market area and as estimated by the appraiser
Effective Age (that's the residual, not REL)


IMO, REL is an economic construct of which physical condition is only one element. Two structures in the same condition but different locations can and sometimes do have radically different RELs.

 

[mike32716]

Extraction has always been a chicken and egg problem for older homes. To extract the site you need a depreciation rate. To extract a market depreciation rate you need the site. Circular reasoning.