Approaches Used to Determine Property Value
The Department of Revenue uses three approaches to determine property value.
Cost Approach - The cost approach involves the determination of a replacement cost new for each structure and the deduction of any loss in value due to physical deterioration, and depreciation. The significance of the cost approach lies in the extent of its application. It is the one approach that can be used on all types of construction on each type of property. It is a starting point for appraisers in determining the value of a property. It's the strongest approach in the appraisal of properties where the lack of adequate market and income data limits a reasonable application of the other approaches to value.
Sales Comparison Approach - This approach is the preferred approach for residential property when a sufficient number of sales are available. Mass appraisal is used, utilizing models, in conjunction with a comparable sales analysis, to provide an estimate of the market value of each property. In making that analysis, individual properties are valued using three to five comparable sales. The comparable sales are adjusted to the subject for differences such as square foot of living area, location, year built, date of sale, quality grade, etc. The result is an estimate of value for the subject property, based on the adjusted sales of the comparable properties. In reality, it's the same approach that is used in making fee appraisals for lending purposes.
Income Approach (For commercial properties only) - The income approach is essentially the determination of value by capitalizing a stream of income using a rate. In applying the income approach, the appraiser must determine market rents, expenses and appropriate capitalization rates. After the appraiser develops a basic set of income and expense models based on market data for the various types of income producing properties, they use a capitalization rate to convert the income into an estimate of value. The models created reflect current economic trends in specific valuation areas.
The value indications produced for each property by the income approach, sales comparison approach and cost approach are compared and reconciled. The final value for each property is determined based on the approach that is best supported by the available data.
Last updated 1/24/2012 7:23:27 AM