There are three ways to determine the real estate value of a property, and each plays a part in the real estate appraisal or assessment.
The most widely-used and accepted real estate valuation approach in residential practice related to property taxes is the sales comparison approach.
This approach bases its opinion of real estate value on what similar real estate properties in the vicinity have sold for recently, with appropriate adjustments for time, acreage, living area, amenities and so on. It is these adjustments where the expertise of the professional real estate appraiser becomes necessary — no computer can tell you how much or little to mark up for a fireplace without knowing the neighborhood, or even talking to realtors and recent buyers in the area, about how important that amenity is for real estate value in that particular location.
Another approach to real estate value is the cost approach.
How much would a property cost to replace, that is, rebuild, minus “accrued depreciation,” that is, depreciation that has occurred since the property actually was built? The cost approach includes concepts like “economic life” and “effective age” that are mostly of use in determining the value of special use properties, special purpose properties or properties where subsequent structural improvements greatly impact value.
The third approach to real estate value is called the income approach.
Some real estate properties generate income for their owners — the most obvious examples being rental properties such as apartment buildings, non owner-occupied houses and duplexes and the like. The rental income an owner might reasonably expect from a real estate property is part of its value. For a purely owner-occupied residential property, this may not be applicable, but it can be important if the property is to be rented out or used otherwise to generate income, such as a storage facility, cell tower rental, or office building.