Approaches Used to Establish Real Property Values

  1. The Sales Comparison Approach – evaluations are based on the actual sale prices of other properties that have sold.  This approach is most appropriate when the sales of similar properties are plentiful and reflect the typical market conditions.  Of the three approaches it is the most easily understood by the public and courts. 
  1. The Cost Approach – based on the premise that a property’s value is set by the “cost” of replacing an equally desirable substitute within a reasonable time frame. This approach works best for newer improvements where depreciation is less of a factor and special purpose properties which do not tend to sell on a regular basis.  It’s important to note that cost and value are NOT necessarily the same: cost is the amount required to produce the item, whereas value is related to how desirable the item is to a potential owner.
  1. The Income Approach – based on the premise that a property’s value is related to its ability to produce an income.  This approach works best for properties that are typically rental type properties (i.e. apartment buildings, warehouses, etc). 

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