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Board of Appeal and Equalization Handbook Three approaches to value Theassessorappliesoneormoreofthethreeapproaches to value in estimating aproperty’s value: Sales comparisonapproach; Cost approach;and/or Incomeapproach. The assessor will consider all approaches to value, but one approach may be better suited than the others for estimating the value of a particular property. In some cases, one or more approaches may not be applicable. Sales comparison approach: This approach is based on thereasoningthatthevalueofapropertyisrelatedtothe sale prices of similar properties in thesame market. Using this approach, the assessor identifies similar properties that have recently sold and analyzes the differences between the subject and the comparable properties. The sale price for each comparable sale is adjusted to reflect the differences (i.e. the subject property has three bathrooms and the comparable property has two bathrooms, so the sale price of the comparable property is adjusted upward to make it more similar to the subject property). The assessor then estimates the value based on the analysis of the comparable sales. The sales comparison approach is most applicable when there is sufficient sales data available for analysis. This approach is most often used for residential properties. It is the most common and preferred method for valuing vacant land when comparable sales data is available. The sales comparison approach should be supported by other approaches to value when comparable sales are limited or unavailable. Cost approach: This approach is based on the principle of substitution which means that an informed buyer will not pay more for a property than it would cost to build an acceptable substitute with comparable utility. Using the cost approach, the assessor calculates market value by estimating the current cost of replacing a structure with one having comparable utility then subtracting depreciation and adding in the land’s value. The cost approach is most reliable when valuing new or relatively new properties because the depreciation is minimal. Depreciation is the loss in value of a property, perhaps due to wear and tear or some other factor. Estimating the amount of depreciation can be difficult making the cost approach less reliable when valuing older properties. The cost approach can be more useful when valuing structures that are not frequently sold. Income approach: This approach is based on the reasoningthatthevalueofthepropertyisdirectlyrelated to its ability to produce income. The property value is measured in relation to anticipated future benefits derived from ownership of theproperty. Using this approach, the assessor reviews income and expense information for the subject property and estimates the market value of the property based upon the income stream projected to be derived from the property. This approach has limited applicability because it is only appropriate for income-producing properties such as commercial, industrial and apartments. The income approach is the primary approach for valuing income-producing properties. 9