Real Estate Valuation

By: Patrick O'Connor

The Approaches to Establishing Property Value

Sales Comparison Approach
The sales comparison approach is used at property tax hearings for houses, land and owner-occupied buildings. It is sometimes used for income properties as a secondary method of valuation. To perform the sales comparison approach you need information on sales of property similar to your property. You can obtain this information from a variety of sources including the appraisal district, real estate appraisers, brokers and third party vendors. Inspect and photograph the comparable sales making detailed notes regarding differences between the comparable sales and your property. Then make adjustments for differences between the subject property and comparables. Adjust comparable sales to the subject property. For example, if a comparable sale has four bedrooms and your home has three bedrooms, make a downward adjustment to the sales price to the comparable sale to bring it down to the level of your house. Select sales as similar as possible to the subject property to minimize adjustments. Comparable sales data is given strong consideration in property tax hearings for houses, land and owner-occupied commercial buildings.

Income Approach
The income approach is typically used for income properties. The basic theory is that investors purchase income properties for the income stream they produce. This income stream can be converted to an indication of market value for the property. The primary steps in the income approach are to estimate the potential gross income using rent comparables and information regarding actual income at the subject property. An allowance for vacancy is estimated based on the performance of the subject property and average vacancy in the area. Operating expenses are estimated using actual expenses at the subject property and market expenses for similar properties. The net operating income is calculated by deducting vacancy and operating expenses from the potential gross income. Net operating income is converted to an indication of market value by dividing it by the capitalization rate.

Cost Approach
The cost approach is not typically used at property tax protest hearings except for new buildings. Appraisal districts often use the cost approach for properties up to two or three years old. After that, they typically use either the sales comparison approach or income approach depending on the type of property. The appraisal district will apply the cost approach for a new property by adding the market value of the land (typically the purchase price) to the construction costs for the building. In addition, they may add an allowance for soft costs and for entrepreneurial profit. If the sum of land and construction cost exceeds the appraisal district's assessed value, it is unlikely they will reduce the assessed value in the property tax hearing. However, if the sum of land and construction cost is less than the appraisal district's initial assessed value, providing this information at the hearing will likely generate a reduction in your assessed value and property taxes.

Uniform and Equal Approach
The Texas Property Tax Code was amended in 2003 to allow property tax for property owners to protest based on "a reasonable number of comparable properties appropriately adjusted." This new section of the Texas Property Tax Code allows a protest based on a limited number (perhaps 3 to 10) of assessment comparables. Some appraisal districts agree and are considering protests under the section. Others have chosen to interpret this section differently.

To prepare a protest using Uniform and Equal, gather data on assessed values for property similar to your property. Make adjustments for significant differences between the assessment comparables and your property. This can include items such as building size, land size, number of bedrooms, number of bathrooms, size of garage, site influences, age, etc. Make negative (downward adjustments) to an assessment comparable for items that are superior in the assessment comparable. For example, if the assessment comparable has four bedrooms and your house has three bedrooms, make a downward adjustment to the assessed value for the assessment comparable for this item. After applying appropriate adjustments to the assessment comparables, calculate the median level of assessment for the assessment comparables. The median is the middle data point after the adjusted assessment comparables are arrayed in order of increasing or decreasing (on a per square foot value basis). Multiply the median per square foot assessed value times the size of your property (improved area) to calculate the value your home should be assessed for based on Uniform and Equal. Section 41.43 of the Texas Property Tax Code provides you the opportunity to protest using this methodology. However, don't be surprised if your local appraisal district is not receptive to this method of protest.

The appraisal division of O'Connor & Associates is a national provider of commercial property real estate appraisal services including cost segregation studies, , , due diligence, insurance valuations, business personal property valuations, business purchase price allocations, and single family litigation support.

All commercial property types benefit from our appraisal services including multi-family housing, retail stores, hospitals, hotels, industrial properties, manufacturing facilities, medical offices, commercial offices, restaurants, self-storage units, shopping malls, shopping plazas and warehouse/distribution centers.

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