There are three principal methods for assessing the value of real property. These differ based on the kind of property being assessed.
- The cost (or replacement) method. This method is used for assessing buildings or other structures. Assessors estimate how much it would cost, using current rates for material and labor, to replace a given structure. An assessor will deduct the reasonable depreciation of the property but add the value of the land. This approach is most appropriate when the assessment is of a new and unique or specialized property. It is also useful when there are no meaningful sales of comparable properties.
- The income method. Under this method, assessors estimate the amount of income from a piece of property if the property is used to produce an income. This method is used for apartments, stores, warehouses, shopping centers, and office buildings. To arrive at an assessment, the assessor considers the business taxes, the amount of income the property may generate, insurance costs, rates of vacancy, operating expenses, maintenance costs, and the current interest rate charged for borrowing money for making improvements or repairs on such a property.
- The market or sales comparison method. Here, sales of similar properties are compared to each other and adjusted for differences. Most residential real estate is appraised by using the market or sales comparison method. This approach is similar to the method banks employ to value property when they consider issuing a mortgage.
Most states appraise various classes or types of real estate using other approaches to value. For example, farmland or timberland may be appraised on its use or level of productivity. Business inventories may be assessed on the basis of the business’s records, as well as the state of its machinery and equipment. And assessors may even combine approaches to arrive at a fair appraisal of a piece of property.
Taxpayers have a right to fair appraisals. Furthermore, no class of property should be over-or under-valued in relation to similar properties within a given area. Even so, it is up to individual property owners to monitor their assessments. To find out which appraisal method was used in a situation owners should contact their local assessor’s office.