Real estate evaluations fall into three categories: Comparitive Market Analysis, Cost Approach and Income Approach
Which method does the Tax Assessor use?
Comparative Market Analysis
A Comparative Market Analysis can be simple or complex; it depends on the availability of comparable properties in three categories: currently listed, sold and expired. The theory is that the value for a particular property can be determined by examining sales activity for similar type properties in similar areas. Residential appraisals are usually done using this approach to value.
Just because a home is identical from the street doesn't mean the values are identical. A well done CMA attempts to equalize the properties as much as possible. Adjustments include but are not limited to features such as square footage, age of HVAC systems, electrical updates, parking, exterior construction/style. updates to kitchens and baths. "When" the comparable properties have sold is another factor; are prices going up? down? or are they staying relatively level.
A thorough CMA by a well trained Realtor® will give you a very good indication of what a Buyer would be willing to pay for your home. Since the Comparative Approach to value is widely used by Appraisers, a CMA from a Realtor® should be fairly close to the value arrived at in an official appraisal report.
Cost approach to value
The "cost approach" is often reserved for newer construction or unique properties. Homes that are located in sub-divisions or area's that are currently being developed or unique "stand alone" properties. What would it cost you to build the house or what can you buy a similar house from a builder for?
The "cost approach" is based on the construction cost of the square footage of the home. If "Buyer Bill" purchased the 2000 square foot "Rose" model during pre-construction for $300.00 a square foot and the builder is now charging $350 a square foot as he starts to offer occupancy on the identical model, the value of "Buyer Bill's" home can be calculated using the "cost approach". Assuming that buyers are willing to buy the exact same unit for the higher price, Buyer Bills unit would be worth the increased amount as well. If Buyer Bill has already lived in his home for 2 years, the value would be calculated based on the price per square footage. Improvements such as decks, finished basements, driveways, landscaping would be added on and depreciation would be taken off.
Sauder School of Business Analysis of Cost Approach to Value
Investopedia explains Cost Approach
Income approach to value
Investment properties are valued on the net income they generate. Two identical apartment buildings may have very different values depending on the rents they generate. The going "cap rate" often determines what investors are willing to pay at any particular time. The lower the interest rates are on secure investments such as bank GIC's, the lower the "cap rate" investors are willing to settle for on income properties. For more information on the Income Approach please check out these resources: