Frequently Asked Questions on Property Appraisal
1. If a large number of residences are listed for sale and are not selling, are appraised values for other residences affected?
If properties are not selling, it is difficult to determine if values are decreasing or remaining stable. Alternate methods, such as comparing historic to current rents or comparing marketing periods can give indications of value. Regardless of how the value is estimated, all properties, not just those listed or sold, should be appraised uniformly.
2. What should an appraisal district do when a majority of sales in a market area are foreclosure sales?
Foreclosure sales may not meet the definition of an arm's length transaction and may or may not represent market value. These sales should be compared to other sale transactions to determine if the prices are a good indication of value. An appraisal district must consider foreclosure sales in appraising residence homestead property, according to Tax Code Section 23.01 (c).
3. When a city has a large number of sales in a "hot" selling area of residences, how can the appraisal district use these sales to value residences in an "older, not hot" part of the city, where there are few or no sales?
The answer to this question depends on the characteristics of the properties that are selling and how they compare to other properties. Typically, there is some specific reason why any particular area becomes desirable, and that reason becomes a market factor that can help delineate a market area. If the property characteristics are similar among all properties, quantifying the value of this particular factor can identify an adjustment that would make the sales more useable when estimating values in other areas.
4. How does an appraisal district develop a depreciation schedule for residential property?
Physical depreciation schedules, for mass appraisal purposes, can be developed from market data. Sales should be grouped by building type. Land and miscellaneous improvement values are subtracted, leaving a building residual value. The building residual is subtracted from the replacement cost new (RCN) to determine the dollar amount of depreciation. The market derived depreciation is divided by the RCN to determine the percentage of depreciation. These percentages can be plotted against the effective age to create a curve through the data to correlate the depreciation to age. This data can then be used to create depreciation tables. For a more detailed discussion, see IAAO's Property Appraisal and Assessment Administration, Chapter 15.
5. How are land schedules developed in areas where current land sales are scarce or non-existent?
If they are available, older land sales may be used with time adjustments. The appraisal district may also consider sales from outside of the county located in similar areas, provided the market factors for the areas are the same. Districts can also use sales of improved properties and employ a land residual valuation technique.
6. How is commercial property appraised?
There are three approaches to value: cost, sales comparison, and income. If reliable data for each exists, all three approaches should be employed in determining the property's value and reconciled into a final estimate.
7. What is an economic obsolescence factor applied to commercial property?
Economic obsolescence, more appropriately called external obsolescence, is a loss in value caused by something external to the property. External obsolescence applies to land, as well as the building, and can be quantified by employing market comparison techniques, either through use of sales or competing rents and expenses
8. How does the appraisal district appraise semi-vacant retail buildings?
The income approach (discounted cash flow technique) is the most reliable indicator of value when a "lease-up to stabilized occupancy" situation exists. The techniques recommended in appraisal literature should be followed to determine stabilized occupancy and other factors.
9. When appraising large chain stores that are closed, how should an appraisal district appraise the property, especially when there are no sales of similarly unused property in the past five years?
The cost approach should be used applying not only physical depreciation, but also functional obsolescence in the form of an incurable functional superadequacy. There may also be external economic obsolescence apparent in the market due to current economic conditions. Care should be taken in the application of the obsolescence factors.
10. When valuing apartment complexes, should an appraisal district use actual rents or market rents in determining the value of the property? Why?
Market rents and expenses should be used to develop a value by the income approach to value. Market rents equate to fee simple ownership and create equitable appraisals. Rents that diverge from market can be an indication of some form of obsolescence that must be applied. If the property suffers from some form of external obsolescence, for example, the divergent rent may offer some quantification for the obsolescence and can be used as an adjustment to the market rent.
11. How does the chief appraiser determine the income and expenses that should be used in determining agricultural productivity values?
Agricultural productivity values are determined based on a prudent landowner's income and expenses in a typical lease in the area. The lease could be a cash lease, a share lease or another lease arrangement. The chief appraiser should rely on information from the Agricultural Appraisal Advisory Board, surveys of landowners and agricultural producers in the county, and state and federal agencies involved in administering agricultural programs.
12. How does the chief appraiser include a "drought factor" in its agricultural productivity value in areas where a significant, long term drought has taken place when such a factor is not considered an allowable expense?
The Tax Code does not allow for a "drought factor" to be used in determining agricultural productivity values; however, because agricultural productivity values are based on the typical lease arrangement in the county, values will change as any factor including droughts affect lease rates. In a share lease when yields are low due to drought and other conditions, the landowner's income will be lower, too, resulting in lower productivity values. In pastureland leases based on animal units when herd size is reduced due to droughts, the landowner's income will be affected and values based on these typical lease arrangements will also be affected.
13. When evaluating property sales for inclusion in a ratio study or the development of cost schedules, may Internet, Craigslist or EBay sales be considered?
International Association of Assessing Officer's (IAAO) Standard on Ratio Studies A.4.6 Internet Marketing states:
"Property that sells on the Internet and meets the criteria of being an open-market, arm's-length transaction should be included as a valid transaction in a ratio study. Brokerage and realty firms are using the Internet as an additional method to advertise and market their inventory of property."
As a result, these sales may be used to develop cost schedules too.
14. What factors are used to determine whether a foreclosed sale can be included for use in a ratio study?
If sales of foreclosed properties are selling for market value, determined by comparing foreclosures to non-foreclosures and other factors, they are suitable for inclusion in a ratio study.