Property valuation plays a major role in determining the amount of property tax you owe. As a real property owner, you must learn how to evaluate your own property in order to determine whether your property is fairly appraised by the county or not.

Are you a real property owner? Then you must wonder from time to time how much your property’s current value is. Learn the 3 methods through which your property can be valuated in this blog.

Property valuation

Property valuation is the process in which the economic value of a property is determined. The process often seeks to determine the fair market value of a real estate property or the price at which an informed seller willingly sells his/her property to an informed buyer. It is also called property appraisal.
However, it is important to note that a property’s price may not be the same as its value. Value is the property’s actual worth compared to similar properties; price indicates what a property might be sold for at a given point in time.
‘Assessed value’ is a term you come across several times as a real property owner. This value determines the tax you pay.
Learn more about it here.

Why property valuation is important

Property valuation is a crucial aspect of buying and owning real property. Among other monetary determinations like how much you acquire the property for, property insurance amount, and settling legal matters like divorce or other lawsuits, property valuation is majorly required to calculate your property taxes for the year.

While property valuation is usually carried out by a professional certified appraiser on behalf of your county and local taxing units, it is possible for an individual to carry out the process too. But it may be a time, money and energy consuming, tedious process. Strictly monetarily speaking, an average appraisal for a single-family home costs roughly between $300-$400. The bigger the property, the higher the cost.

The following are the three methods to valuate a property:

1. The income approach

The current value is determined by the net income a property generates divides by the capitalization rate(cap rate).
Income and expense statements for the subject property and similar properties in the same area are collected to estimate the Net Operating Income (NOI). Here are the steps to calculate it:

• Gross Potential Income: Get the total income a property generates with 100% occupancy.
• Effective Gross Income: Based on similar properties in the area, estimate vacancy costs to reflect the normal loss of income.
• Property expenses: Estimate fixed and variable expenses. Property tax and mortgage are examples of fixed expenses, while utilities and management fees fall under the variable category.
• NOI: Subtract the estimated expenses from Effective Gross Income.

The next step is to choose an appropriate cap rate, which is estimated by using market sales of comparable properties sold recently.

Income method:
Property value = NOI/Cap Rate

What type of property do you own? Learn what method is used to mass appraise based on your property type here.

2. The sales comparison approach

Here, market data of sale price is used to estimate the value of a property. The subject property is compared to similar properties that have recently been sold. Comparable properties (also known as comparables/comps) must share certain features with the subject property. Square footage, number of rooms, condition and age of the building, and most importantly location of the property are important factors.
As no two properties can be exactly the same, adjustments are made to compare. It is important to track the differences and how they are valued.

What type of property do you own? Learn what method is used to mass appraise based on your property type here. (Need to add a product-based CTA here - on locating comparables)

3. The cost approach

The cost approach considers the cost of any given property as the cost of the land plus the cost of construction (replacement costs) minus the physical and functional depreciation. Construction cost is based on the current cost of replacing a structure with one of equal utility, using current materials, design, and building standards. The cost of individual construction components and building items are needed to adjust for features that differ from base specifications.
Land cost is calculated using the sales approach. It simply studies properties similar in size and location (comparables) that have recently been sold. The most common way to determine the replacement cost is to find out the cost to build a square foot of comparable properties multiplied by the total square footage of the building.

Now that you know the 3 methods to valuate real property, learn what method is best suited to what type of property here.

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