Property Tax Valuation Methodology and Supporting Data

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Property Tax Valuation Methodology and Supporting Data

There are three basic methods used by appraisers to find the value of property:

  • Comparable sales of similar property approach
  • Replacement cost less depreciation approach
  • Income approach

In most residential appeals, the most reliable type of evidence to support your opinion of “fair market value” is the sale of properties similar to yours. These are called “comparable properties.”

Before you begin to gather evidence about comparable properties, you should gather information about your own property. Determine the age, building size(s), lot size, and so forth for your property first, and then compare that information with the assessor’s information for your property. The following information explains how to judge whether a sold property is comparable to your property.

Comparative Sales Approach to Value

“Comparable sales” are sales of other properties that are similar to yours. Three different standards are used to judge the comparability of the properties you submit as evidence.

~Are the sales arm’s-length open market transactions?

“Arm’s-length open market transaction” refers to conditions surrounding the sale.

  • Was the property exposed for sale on the open market?
  • Was the property available for sale to anyone?
  • Did the seller have to sell quickly?
  • Was the property listed for sale with a Realtor?
  • Did the buyer and seller know each other?

For example, a house sold between relatives may sell for less than if it were sold to someone the seller does not know. In that situation, a sale may not be an “arm’s-length open market transaction.”

~Are the properties physically similar to your property?

Elements used to measure the physical similarity include, but are not limited to, the following:

  • Distance from your property
  • Zoning
  • The number of bedrooms and bathrooms
  • Year built
  • Size of improvement, such as a house – in square feet
  • Lot size and other attributes – such as a view
  • Miscellaneous improvements – pools, patios, and so forth
  • Quality of construction
  • Property condition – excellent, good, fair, or poor

~Are the comparable sales relevant for the valuation date ofyour property?

By law, an appeals board may only consider comparable sales that haveoccurred no later than 90 days after the valuation date of your property thatyou are appealing (the valuation date is explained below). Comparable salesthat occur well before or up to 90 days after the valuation date areacceptable, but sales closer to the valuation date will most likely be viewedby an appeals board as more reliable.

The comparable sales approach to value is the most common and reliable type of evidence used to support an opinion of “fair market value”; particularly for single family residences. If the opinion of value is to be supported with evidence of comparable sales, the properties sold shall be described by the Assessor’s parcel number, street address or legal description sufficient to identify them.

There are three general criteria used to evaluate the “comparability” of a property:

1) The sale of the property must be an arms-length open market transaction.

2) The “comparable” property must be similar to yours based on size, quality, age, condition, utility, amenities, site location, legally permitted use and other physical attributes; and

3) The date of the sale of the comparable property may be any time prior to the valuation date, but cannot occur more than 90 days after the valuation date of your property (the date for which the fair market value of your property is being determined).

What Valuation Date To Use

The valuation date – the date used as the basis for determining the value of yourproperty – depends on the reason for your appeal.

Decline in Value January 1st (must be owner or lessee on record) Relevant comparable sales dates:May be any time before the valuation date (January 1st ) but may not exceed ninety (90) days after the valuation date (March 31st).
Change of Ownership Actual date of transfer relevant comparable sales dates: May be any time prior to the transfer date, but no later than ninety (90) days after the actual date of transfer.
New Construction Date of Completion
Partial Completion New Construction Lien date (January 1st)
Misfortune or Calamity Any time prior tocalamity date, but no later than ninety (90) days after actual date of calamity.

Where To Find Comparable Sales Data

You can find comparable sales data at most local assessors’ offices. Manyassessors’ offices maintain a listing of comparable sales. It is available forinspection at little or no cost, but rarely includes the level of detail needed for a persuasive argument.Additional sources of data include local real estate agents and brokers, and real estateappraisers. If you use one of these other sources of data, youshould ensure that they find comparable sales appropriate for the valuation date ofthe property you are appealing.Be sure to obtain the full address and/or the assessor’s parcel number for eachcomparable sale you plan to present as evidence. You should drive by the comparable properties to determine the similarities anddifferences between each comparable sale and your own property. Photographs mayhelp to illustrate your case for the appeals board.

How to Evaluate Comparable Sales

To evaluate sales, applicants frequently compare the “price per square foot of livingarea” for each of the compared properties. “Living areas” do not include garages,porches, or patios.To determine the “price per square foot of living area” for a property, divide the saleprice by the square foot size of the living area.

For example: Sale Price $210,000
Living Area 1,200 sq. ft.
$210,000 ÷ 1,200 = $175 per sq. ft. of living area

At yourappeal, you must also apply adjustmentsforsignificant differences between your property and comparable sales and be able to discuss and defendadjustments made. The appeals boardwill expect to see adjustments for differences initems such as market conditions at the time of sale, buyer/seller motivation, location, quality of construction, design, age, condition, lot size, improvement size, and amenities. All factors that significantlyaffect the value should be analyzed, discussed andlogically lead the Appeals Board to your value conclusion.

Cost Approach to Value

If your property was newly constructed, the Cost Approach may provide a reliable indication of market value. In this approach, construction costs forreplacementof the improvements new, less accrued depreciation, is added to the land value to provide atotal estimate of value for your property. Since construction costs vary widely among contractors and localities, and change over time, these estimates may be difficult to accurately determine. Most assessors offices rely uponupdated cost manuals prepared by the State Board of Equalizationor industry cost publications/online services, such as Marshall & Swift,for their estimates.They include typical contractor’sprofit, but exclude entrepreneurial or developer’s profit.

Property owners who supervise their own construction and negotiate favorable pricing are often shocked when the assessor enrolls a significantlyhigher value. To win your appeal based on the Cost Approach, you must show that assessor overstated building costs, understated accrued depreciation, or overstated land value. The fact that you paid less is helpful, but not proof enough. The assessor must use typical market pricing for their estimates and it is up to you to prove them wrong.

Income Approach to Value

The income approach to value is used when the property has been purchased in anticipation of the money income that it will generate. An apartment building, purchased to generate rental income, would be an example of when the Income Approach to value would be appropriate.

To support your opinion of value using the Income Approach, market derived estimates of gross income, vacancy and collection losses, allowable operating expenses, and capitalization method (direct capitalization or discounted cash flow analysis) should be presented.

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