Certified Residential Appraiser Practice Exam

Which method uses sales data to extract property depreciation?

1. Age-Life Method

2. Market Extraction Method

3. Breakdown Method

4. Cost Approach

The correct answer is: Market Extraction Method

The Market Extraction Method is a technique that relies on the analysis of sales data to determine property depreciation. This method utilizes the principle of comparing similar properties in the market, examining their selling prices relative to the physical characteristics and the current condition of those properties. By analyzing these transactions, appraisers can infer the amount of depreciation that has occurred for a specific property type or asset. Essentially, appraisers look at the sales prices of similar properties that have experienced varied levels of depreciation and then extract that information to estimate how much value has been lost due to age, wear and tear, or other factors. This method is particularly useful in markets with active transactions, where enough comparable data can be gathered to establish reliable depreciation trends. In contrast, the Age-Life Method calculates depreciation by estimating the total economic life of a property and determining the effective age. The Breakdown Method identifies specific components of depreciation (physical, functional, and external) rather than relying solely on market sales. The Cost Approach primarily focuses on the cost to replace or reproduce an improvement, subtracting depreciation, but does not use sales data directly for its calculations. Thus, the effectiveness of the Market Extraction Method in utilizing sales data for evaluating property depreciation makes it the correct choice.