To find the value of any piece of property, the assessor must first know what similar properties are selling for, what it would cost to replace the property, what rent it may earn and what are the attributable expenses. Using these facts, the assessor can then go about determining the property value in one of three different ways.
Sales Comparison Approach
The first method compares a subject property to others recently sold. These prices, however, must be analyzed very carefully to get the true picture. One property may have sold for more than it was really worth because the buyer was in a hurry and would pay any price. Another may have sold for less money that it was actually worth because the owner needed cash right away and the property was sold to the first person who made an offer. When using the sales comparison approach, the assessor must always consider such over-pricing or under pricing and analyze many sales to arrive at a fair value. Size, quality, condition, location and time of sale are also important factors to consider.
A second way to value a subject property is based on how much money it would take, at current material and labor costs, to replace your structure(s) with ones similar. If your property is not new, the assessor must also estimate how much value has been lost to wear and tear, or other factors such as obsolescence. The adjustment, called depreciation, is then deducted from the replacement cost. Finally, the assessor estimates the lot value and adds this to the depreciated cost of the structure(s) to arrive at the total property value.
The third way is to evaluate how much income a property would produce if it were rented as an apartment complex, office building or shopping center. The assessor must consider operating expenses, taxes, insurance, maintenance costs, and the return most people would expect on those types of properties. The net income from operation of the property is then capitalized into a value estimate by using a rate providing a return on the property investment. This method of estimating value is rarely used to appraise single family residential properties.