Property value can be defined as the amount a person is willing to pay for a property and the amount the seller is willing to accept. Several factors play a critical role in assessing the value of a property. These include the market approach, cost approach and income approach.

Market approach

The assessor compares the property to similar properties that have been sold previously. This approach mainly values residential, vacant, and farm properties. This method often provides the most reliable evidence because sales are based on the actions of buyers and sellers in the marketplace. This approach assumes the typical buyer will compare sales and asking prices to make the best possible purchase. This principle presumes that a practical buyer will pay no more for a property than the purchase price of a similar property. Collecting and analysing sales data and selecting appropriate units of comparison are critical to applying the market.

Sales Data

Furthermore, the sales data must be adjusted to the market conditions and then applied to the subject property of the appraisal. The assessor must gather sales from recorded instruments and analyse them to confirm the conditions of sale and the validity of the sales price. An assessor can only use a sale that is representative of the market. Verify sales by personal contact or letter to ensure the most reliable sales. During the verification process, it may be revealed that the sale involved personal property, an exchange, or unusual motivation by the buyer or seller. When possible, sales should be physically inspected to determine the property’s condition at purchase.

Market Transactions

An assessor must gather the information to complete the sales study, including the date of transfer, type of conveyance, condition of sale, consideration and characteristics of the property.

Transfer date: If there is enough sales data, an assessor can use only the most current sales to compare prices. If there is no current data, the old sales data can be used to determine the value if the data is correctly adjusted for time.

Type of Conveyance: The type of conveyance and the rights conveyed highlight the validity of the information.  Conveyance is defined as the legal process of transferring land ownership from one individual to another.

Condition of sale: The conditions of the sale must be considered, whether it is a sale between relatives or business partners, foreclosure, government transactions, estate sales, or sales made by coercion. These conditions may not reflect the actual market value.

Consideration: A sale that involves an exchange between relatives or business partners or an assumption of a mortgage must be investigated to determine if the sale reflects the actual market value.

Property characteristics and inventory: the property’s inventory and condition must be verified at the time of sale to ensure that it is equivalent to the actual market value. The property may have changed after the purchase, and these differences must be documented.

Sales Comparison

Once you have determined that the sales are valid, compare the sold properties to the subject property (property that is being assessed).  The comparison process involves:

1. Researching and selecting sales of comparable properties.
2. Documenting and confirming sales data.
3. Selecting relevant units of comparison.
4. Comparing sale properties to the subject property and making appropriate adjustments.
5. Reconciling value indications and estimating the value of the subject property. The comparable sales should always be adjusted to be equivalent to the subject property. If the comparable is superior to the subject, apply a minus adjustment to the comparable sale. If the comparable property is inferior to the subject, use a plus adjustment to the comparable property.

Cost Approach

With the cost approach, the assessor calculates the cost to replace a structure with a similar one using today’s labour and material prices. The cost approach considers that a rational buyer would be willing to pay no more for a property than the amount it would cost to replace it with a similar property. The cost approach method weighs the cost of building an identical new property to an existing one.

• To determine the value of land using the cost approach, first value the land as if vacant. Land value is determined by comparing sales of similar vacant land in the area where the subject is located.
• The second step is determining on-site development (OSD) costs. OSD includes excavation, grading, backfill, gravel drives, and water and sewage disposal systems.
• The third step is to estimate replacement or reproduction costs to make improvements.
• The fourth step is to deduct the total difference between the new cost (replacement or reproduction) and the present value of an improvement. This is called the depreciated replacement or reproduction cost (DRC).
• Lastly, using the cost approach, add the land value to the depreciated cost of the improvement for a total indicated value.

The cost approach values industrial, particular purpose and utility properties.

Income approach

The valuator analyses the amount of income a property will produce if rented.

The assessor takes into account several costs, including:

• Operating expenses
• Insurance
• Maintenance costs
• Financing terms
• Amount expected to be earned

Assessors will also use automated mass appraisal techniques to analyse property sales and simultaneously estimate values for multiple properties.

This method is used for commercial properties with tenants because it relies on rental income. The formula for the income approach is:

Net Operating Income / Capitalization Rate = Market Value

Net Operating Income

This involves deducting operating expenses before subtracting capital expenditures, debt service, and taxes. The formula for calculating net operating income is:

Effective Gross Income – Operating Expenses = Net Operating Income

The adequate gross income is the total of all income earned from the property. The appraiser will need access to income and expense accounts for the subject building and similar structures in the neighbourhood to estimate net operating income. This information will allow the appraiser to accurately assess the building’s income and expenses. The capitalisation rate is the rate of the return on a property based on the net operating income.

Property values are often assessed through three main approaches: the market approach, the cost approach, and the income approach. These approaches provide a comprehensive method for determining property values based on market dynamics, replacement costs, and income potential.