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CHAPTER II

THE REAL ESTATE APPRAISAL PROCESS

The property tax is an ad valorem tax, meaning that the tax levied is directly proportional to the assessed value of the property being taxed. That is, in most cases, the greater the property value, the greater the tax.

The assessment function is carried out at the local level by an assessing officer whose duty it is to ensure that all property is assessed uniformly and equitably. The assessing officer may be known as an Assessor, Evaluator, Supervisor of Assessments, Director of Finance, Commissioner of the Revenue, Board of Assessors, or any number of other titles. The Assessor is either elected, appointed, or serves under civil service.

This administrator is responsible for the discovery, listing, and valuing of all taxable property in his jurisdiction. Most often, this valuation is determined by a cadre of appraisers who use accepted methods and techniques for determining the assessed value.

Title 58.1-3201 of the Code of Virginia states that, "All real estate, except that exempted by law, shall be subject to such annual taxation as may be prescribed by law...all general assessments or annual assessments in those localities which have annual assessments of real estate, except as otherwise provided...shall be made at 100% of fair market value."

Fair market value is defined by the courts as "The price it will bring when it is offered for sale by one who desires, but is not obliged to sell it, and is bought by one who is under no necessity of having it.

Sales Comparison Approach

The Sales Comparison Approach is the most popular and accurate for determining market value when adequate sales of comparable properties similar to those being appraised, exist. Adjustments for differences in the properties are made and value is estimated for the subject by comparison.

Cost Approach

The Cost Approach, sometimes called the Summation Approach, consists of estimating the current reproduction or replacement cost of the improvements, deducting any accrued depreciation, and adding the value of the land. This technique is good for estimating the value of new properties with little or no accrued depreciation, and whose improvements represent the highest and best use of the property. Accrued depreciation is difficult to estimate, however, when the improvements are old or in poor condition and may not be the highest and best use of the property.

Income Approach

The Income Approach is most applicable to commercial properties that are bought and sold based on their earning potential. This process involves estimating the potential gross income from the property, deducting typical vacancy and collection losses and operating expenses, to arrive at net operating income. This net operating income is then converted into value using capitalization rates made up of a discount rate, tax rate, and recapture rate for improved property.

Correlation and Final Estimate of Value

The final step in the appraisal process is the procedure by which the value indications derived from the three approaches to value are correlated into a final estimate of value. At this point in the appraisal process, the assessor must review his work and consider these factors:

1. The amount and reliability of the data collected in each approach.

2. The inherent strengths and weaknesses of each approach.

3. The relevancy of each approach to the subject property.

After considering these factors, the most relevant approach should receive the most weight. The final estimate of value is based upon this decision but is not necessarily restricted to the actual dollar amount resulting from the approach selected.

Level of and Uniformity of Assessments

When the appraisals are complete, their accuracy is measured by comparing their assessments to their latest sale prices. This is the assessment/sales ratio. The median assessment ratio is an indication of the level of assessments in jurisdiction to fair market value. Two additional statistical measures are used to show the uniformity of assessments. The coefficient of dispersion indicates how close the individual assessment/sales ratios are arrayed around the median ratio. A coefficient of dispersion of less that 10% indicates a good distribution of residential properties, while 15% or less is acceptable for agricultural properties because of the greater diversity in their values. The regression index is used to gauge the relationships of assessment ratios in high and low priced values. It compares assessment ratios to the mean ratio. An index of 1.00 indicates a uniform relationship. An index above 1.00 indicates the less expensive properties have a higher assessment/sales ratio than more expensive properties. The converse is true if an index is below 1.00.

Copyright 2005, Virginia Association of Assessing Officers