Certified Residential Appraiser Practice Exam

Which valuation method is based on typical ratios of land value to improvement value in specific locations?

1. Allocation Method

2. Extraction Method

3. Sales Comparison Approach

4. Surplus Land Approach

The correct answer is: Allocation Method

The allocation method is a valuation technique that utilizes established ratios of land value to improvement value in specific geographic areas. This approach reflects how the market assigns value to land and improvements in a particular location, which can help appraisers determine a property's worth by allocating a portion of the total value to the land and the rest to the improvements based on prevailing market trends. The method is particularly useful when a market is consistent, and where historical data about land and improvement values exists. By applying these typical ratios, appraisers can effectively estimate the value of a property without needing detailed cost breakdowns for each component. In contrast, the extraction method focuses on deriving land value from comparable sales by subtracting the estimated value of improvements from the total sale price of a property, whereas the sales comparison approach relies on comparing the subject property to similar properties that have recently sold. The surplus land approach evaluates excess land that is not currently needed for the highest and best use of the property but may hold additional value. Each of these methods serves different valuation purposes, but the allocation method is distinctly based on location-specific ratios of land to improvement value.