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Assessor

Real Property

Valuation of Real Property

What is real property? Real property is defined by the Utah State Tax Commission as The interests, benefits, and rights inherent in the ownership of real estate.

How does the Assessor’s Office determine the value of real property? The initial phase is a site visit when a new structure is being built, or a change has been made to the existing building. When a change is made to an existing structure, a site visit is performed to update the county record with the new information. This information is gathered to ensure that the county records are as accurate as possible. The valuation stage comes after the initial collection segment.

Invalid/Under Duress Sales



Sales Comparison

The Sales Comparison approach is the most common approach to valuing residential properties. In this approach, the appraiser compares the property being appraised to similar properties that have recently sold. Similarities and differences must be noted in detail such as: date of sale, location of property, physical characteristics, and conditions of the sale.

Before an appraiser can use home sales as comparables, the sale must be verified. The sales are analyzed to determine if they are "arm’s length" transactions. An arm’s length transaction is defined as “a transaction between unrelated parties under no duress. There are multiple reasons for a home to sell under duress. These reasons include, but are not limited to: foreclosure, short sales, estate sales, job transfer, divorce, etc. Because duress sales typically don’t sell for market value, these sales are removed from the analysis.

The appraiser makes adjustments to the sale prices of the comparable properties for different variables such as location, size, quality, condition, amenities, etc. Appraisers generally use a Paired Sales Analysis to determine market differences for different features.

Below is an example of a Paired Sale

Home "A" Home "B"
1,000 Sq. Ft. 1,000 Sq. Ft.
2 Car Garage 2 Car Garage
Full-Finished Basement Full-Finished Basement
2 Bedroom 2 Bathroom 2 Bedroom 2 Bathroom
1 Fireplace No Fireplace
Sold 1/10/2010 Sold 1/12/2010
Sold Price $100,000 Sold Price $98,500

There is a $1,500 difference in sales price. The only difference between the two homes is that Home "B" does not have a fireplace. The $1,500 shows that, all things the same, a buyer is willing to pay $1,500 more for a fireplace.



Income Approach

The Income Approach is the most often used approach in the appraisal of commercial or industrial properties, or properties which are bought and sold by investors primarily because of their income producing potential. This approach to value depends on reliable and detailed information on the income and costs of doing business for a particular business or enterprise.

This is referred to as the "income stream" of the property. The income approach defines value as "the \ present worth of future benefits of owning a property." These are composed of the annual income for an estimated number of years (called the economic life of the property) plus a capital amount representing land value or land value plus some remaining worth of the improvements. This approach emphasizes investment components rather than physical components of a property.

The steps in the income approach are:
  1. Estimate potential gross income (PGI)
  2. Add miscellaneous income
  3. Deduct vacancy and collection losses to derive effective gross income (EGI)
  4. Deduct operating expenses to derive net operating income (NOI)
  5. Select appropriate capitalization rate and method
  6. Develop an estimated value

Here is an example of the Income Approach:

Income

  • Potential Rental Income (Small Office Condo)
  • Add: Misc Income (if any, coin operated vending machine, parking, etc)
  • Less: Vacancy/Collection loss
Amount Description
$19,200.00 $800/month * 12 months * 2 units
$0.00 No Misc Income
$960.00 5% in Vacancy Losses
$18,240.00 Effective Gross Income

Expenses (Based on Effective Gross Income)

  • Fixed (does not vary with use)
  • Variable (vary with use)
  • Others
Amount Description
$800.00 Insurance
$2,000.00 Taxes
$960.00 Managment Fee (5%)
$220.00 Painting
$100.00 Exterminating
$600.00 Repair/Maintenance
$1,880.00 Total Variable Expenses
$680.00 Other Expenses: Replace Reserves
$5,360.00 Total Expenses

Net Operating Income = Effective Gross Income - Total Operating Expenses
Example: $12, 880 = $18,240 - $5,360

Value

Value = Net Operating Income / Capitalization Rate
Example:$135,579.00 = $12,880 / 9.5 %

In this example the Small Office Condo is worth $135,579.00


Cost Approach

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. The Cost Approach works best for new residences, specialty buildings, large commercial units, and when little market data is available.


The steps in performing the Cost Approach are:

  1. Estimate the land value, as if vacant
  2. Estimate the replacement cost new of the improvements
  3. Estimate cash amount of accrued depreciation due to loss in value, physical deterioration, and obsolescence
  4. Deduct the accrued depreciation
    • Physical – Deterioration due to weathering, wear, tear, etc.
    • Functional – Depreciation resulting from deficiencies or super adequacies in the structure
    • Economic (external) – Obsolescence due to outside of the subject property
  5. Estimate the present depreciated value of other improvements
  6. Add estimate of land value to the depreciated value of improvements to get the value of the subject property.

Sample use of Cost Approach:

  1. Land value, as if vacant: $50,000
  2. Replacement Cost New (RCN): $180,000
  3. Physical deterioration: $35,000
  4. Functional obsolescence: $15,000
  5. Economic obsolescence: $5,000
The total accrued depreciation is $55,000 ($35,000+$15,000+$5,000)

The depreciated value of improvements is $125,000 ($180,000-$55,000)

Value indicated by the Cost Approach: $175,000 ($125,000+$55,000)

In this example, our house is worth $175,000.

Contact Information

Physical Address
Davis County Admin Building
Assessor's Office (Room 302)
61 South Main Street
Farmington, Utah 84025

Mailing Address
Davis County Assessor's Office
P.O. Box 618
Farmington, Utah 84025

Phone Numbers
(801) 451-3250 :: Main
(801) 451-3134 :: Fax

Hours
Monday – Friday
8:00 a.m. to 5:00 p.m. (except legal holidays)

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