Real Property, A Basic Overview
The Utah State Tax Commission defines Real Property as the interests, benefits, and rights inherent in the ownership of real estate. Real estate is defined as an identified parcel or tract of land including any improvements.
How are real property values determined?
The process of determining the value of real property begins with a site visit. The Assessor’s Office conducts an on-site inspection when a new structure is built or when a change has been made to the existing structure. These visits are performed to update the county record with the new information. This information is gathered to ensure the county records are as accurate as possible. Once the initial collection of information is complete, the valuation process begins. There are three approaches to estimating market value. These methods are the Sales Comparison Approach, the Cost Approach, and the Income Approach. Each approach to value is explained in detail below.Sales Comparison
The most common approach to valuing residential properties is the Sales Comparison Approach. In the Sales Comparison Approach, the appraiser compares the property being appraised to similar properties that have recently sold. The appraiser will make adjustments to the sale price of each comparable property for different variables. The variables most often used include: time, financing, location, size, quality, condition, and amenities.
The sales must be carefully analyzed to determine if they were arm’s length transactions. An arm’s length transaction is defined as “a sale between a willing buyer and a willing seller that are unrelated and are not acting under duress, abnormal pressure or undue influences, both seeking to maximize their positions from the transaction.”
Below is hypothetical example of a paired sales analysis using the price difference between one home without a garage and a nearly identical home with a garage.
As illustrated in the example, there is a $10,000 difference in the sales prices of the two homes. The only difference is Home A’s 2 Car Garage. This shows with all else equal, a buyer is willing to pay $10,000 more for a 2 Car Garage.
The Cost Approach is based upon the proposition that an informed buyer would not pay more than the cost of producing a substitute property with equal utility as the subject property. This approach works best for new residences, specialty buildings, large commercial units, and when little market data is available.
The basic formula for the Cost Approach is the cost to replace the improvements minus depreciation plus the value of the land. The Cost Approach starts with determining how much it would cost to replace the improvements utilizing current material and labor costs. This is referred to as Replacement Cost New (RCN). Once the RCN is calculated, the appraiser will determine how much value has been lost through various forms of depreciation.
- Physical depreciation is the loss in value through wear and other damage.
- Functional obsolescence is the loss in value due to changes in market tastes. One example is having one bathroom when the market prefers two bathrooms.
- External (Economic) obsolescence is the loss in value from a source outside of the property. One example is excess traffic noise from a home located along a busy street. While sometimes you can cure physical (replacing worn out shingles) or functional depreciation (adding a bathroom), economic depreciation is always incurable.
Below is an example of the cost approach.
This example illustrates the indicated value of the home at $218,000.
The Income Approach is most often utilized in the appraisal of income-producing properties such as commercial, industrial, retail, or apartment properties, which are bought and sold by investors because of their income producing potential. The Income Approach defines value as “the present worth of future benefits of owning a property.”
Below is an example of the Income Approach.
This example shows the value of this small office building as $153,000 (rounded).
Utilizing the three approaches to value discussed above, the Assessor’s Office employs a CAMA (Computer Assisted Mass Appraisal) system and factoring to appraise residential and commercial properties.
By using a CAMA (Computer Assisted Mass Appraisal) system, the Assessor’s office creates a valuation model. A valuation model is a statistical technique that analyzes the characteristics of sold properties and applies that analysis to estimate the value for similar properties. This method is not as exact as a qualified appraiser valuing each property individually. However, it provides the taxpayers of Weber County the most effective and economical process available.
Factoring is a method of updating property values without performing reappraisal. Each year, the Weber County Assessor’s Office and the Utah State Tax Commission perform an assessment/sales ratio study. This study is performed by taking the assessed value and dividing it by the cash equivalent sale price of a property to find the sales ratio. The ratios are then compiled in a list using several different stratifications. The typical stratifications are property use, political boundaries (cities), property age, or property region. These studies are performed to ensure the county is within the legal level of assessment. Level of assessment is the ratio of assessed value to the actual market value, typically measured as the net sale price of a property. Currently in Utah, the legal level of assessment is 100% of market value. The measure of central tendency (either average or median) must be within 10% of the legal level of assessment. If the measure of central tendency for a group of properties is outside of the legal level of assessment, the county has to either reappraise or institute a factor.
For example, if the assessment/sale ratio shows a group of properties is at 85% of market value, then all properties in this group must be factored to 100%. The formula for determining a factored assessed value is the assessed value/ratio. In this case:
The estimated value of this property using a factor is $118,000 (rounded).
After considering all of the above valuing methods, the Assessor’s Office strives to keep all property assessments equitable in relation to their market value.
Equity is a measure of consistency in the valuation of real property. The ultimate goal is to have the same level of assessment regardless of property use or geographic boundaries. This does not mean that every property should have a similar value. Rather, each property should be assessed at a similar proportion in relation to its actual market value. A comparison of the subject property to other similar properties would include but is not limited to the following characteristics: location, size, quality, condition, and amenities.