Real estate is appraised at its actual value by county appraisers for property tax appraisal purposes. Colorado appraisers generally use three approaches to determine market value: market, income, and cost.
Appraisers use the market approach to determine property value by analyzing the selling price of comparable properties sold during the reference period. They take into account the characteristics of the property, including size, shape, classification and zoning, when comparing properties. Only “similar” properties should be used to determine the value of the property. If appropriate sales data is not available within the 18-month data collection period, the evaluator is allowed to roll back in six-month increments up to five years to obtain comparable sales data.
The appraiser uses the income approach to determine the value of the property by analyzing operating income, expenses and vacancy to determine the net operating income of the property. The expert then divides the net operating income by the capitalization rate determined to establish the value of the property. The higher the net operating income and the lower the capitalization rate, the higher the value of the asset. This approach is typically used for income generating properties to determine the financial return an investor could expect from the property. An appraiser may not have the correct rental rates, expense rates, or vacancy rates.
Using the cost approach, the appraiser determines the value of the property based on the expected or actual development and construction costs to build it. This approach is used in limited circumstances, such as for new construction. The appraiser considers how much it would cost to rebuild or replace the property to determine the value of the property.
Â© 2021 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume XI, Number 74