Property Evaluation Methods: Door Number One, Two, or Three?
by Client Care
on Friday, September 7th, 2012 at 9:47am.
If you want to evaluate your real property, there are three popular methods. You can pick whichever one you want, just like the TV game show called Let’s Make a Deal, but as Monty Hall used to say, you might get stuck with what’s behind that door.
But you can also combine them and modify these approaches. Most county auditors will work with whatever you choose. The three primary valuation tools include the cost approach, the comparable approach, and the income approach.
The cost approach refers to the actual reproduction cost of the property. This means the amount of money it would take to replace the property as an exact replica. You start with that amount, and then you subtract the depreciation of the property as it stands at the time of the valuation. Then you add in the cost of the land on which the property sits.
Many appraisers like to use this method as a starting point, and it’s a good way to calculate taxes. With a new structure built on the land, a savvy homeowner prefers to use the cost approach. The structure’s value would have to be part of the initial figure before any depreciation is subtracted. This might represent a better stance for the owner than one of the other methods.
The income approach is best used for industrial or commercial property. This takes into consideration the potential earnings that can be generated through use of the property. And it means you have to consider the different uses that could be applied to the property. For example, say a company owns an entire building and rents out part of it to another company. Suppose the landlord company has the option to stop renting it and expand its own business venture? The assessor can choose to assess value based on whichever way yields more income.
With all this to consider, appraisers go through some convoluted spreadsheet gymnastics before they reach a number that really reflects a property’s potential. However, the value is reached with objectivity; there’s no concern about an individual’s personal preferences the way there would be with residential property. Sometimes this is referred to as a value-in-use valuation. The liquidation value of the property might be a part of the income valuation, if that made sense to the parties involved.
The third method for evaluating a property’s worth is the comparable approach. This is the door chosen most often by homeowners. When an appraiser is trying to reach a figure for residential property, he has to look at comparable characteristics: What is the specific location within an overall neighborhood? Was this home built around the same time as most other homes, or before or after? The quality and condition come into play, too. If a home has been updated with features added and been very well maintained, the appraiser considers whether you can say the same about the other homes in the area.
If you’re using a comparable approach to appeal a tax assessment, for example, you can get the sales figures you need for area homes from your county tax assessor’s office. Many counties prefer to include figures from five years back up to the present time.
You can also combine these approaches to evaluate a property. Going back to the landowner who has built a new structure on his property, he could use the cost approach for the structures, and then if the area’s land values have jumped recently it behooves him to use the comparable approach for the land valuation. When this happens, we usually move to a new show called The Price is Right.