This question that was asked of me yesterday triggered the notion that there was a need to write about it.
Each of these three valuation processes have different end goals. It’s important to understand which value can be relied upon to represent fair market value.
When either a real estate broker or accredited appraiser is gathering information to determine a value, neither the insurance nor assessed tax values are taken into consideration.
It’s not what everyone wants to hear. If you’re hoping for a high value, you’re more likely to quote the number stated on your insurance policy. Let me explain.
Underwriters have reference guides that are used to arrive at real estate replacement cost.
Their sole purpose is to determine the cost to replace the land improvements in the event of some form of natural disaster or destruction.
The insurance premiums are based on these values. Often the underwriters’ guides used to determine the numbers are not derived from local construction costs.
I have found them to be on the high side of estimated replacement cost and certainly not to be relied upon to determine market value.
Whether undertaken by and accredited appraiser or a commercial real estate broker, these values are most likely to represent what a property will sell for.
Keep in mind the process is not a science rather, it is a subjective opinion of value arrived at as a result of gathering relevant, current market, and sale data.
Typically, three methods are considered: Cost replacement less depreciation, market approach and income approach.
Although considered to be the best reflection of current market value, an appraisal is to some degree an opinion and cannot always be relied upon as the gospel.
The method of calculation varies (see above three methods) between different tax jurisdictions however the purpose is always the same.
Your property tax bill is based on the assessed value of your property, any exemptions for which you qualify, and a property tax rate. A mill rate is applied to the value to arrive at your annual tax amount.
I understand that these numbers were used in the late 50’s and early 60’s to determine values. They no longer correlate with true market value in any of the jurisdictions that I’ve worked on in my career.
Do you have another way of looking at this question? Invite your input.
Posted by Barry Stuart