Valuing Property - Texas Comptroller

How Property is Valued

Each appraisal district determines the value of all taxable property within the county boundaries. Tax Code Section 25.18 requires appraisal districts to reappraise all property in their jurisdictions at least once every three years. Tax Code Section 23.01 requires that appraisal districts comply with the Uniform Standards of Professional Appraisal Practice (USPAP) if using mass appraisal and use the same appraisal methods and techniques when appraising the same or similar kinds of property. Appraisal districts must evaluate the individual characteristics that affect the property's market value in determining the property's market value.

The Appraisal Foundation defines mass appraisal as "the process of valuing a universe of properties as of a given date using standard methodology, employing common data and allowing for statistical testing." USPAP's Standard 5: Mass Appraisal Development - which applies to appraisal districts performing mass appraisals - states that a mass appraisal includes:

• identifying properties to be appraised;
• defining market area of consistent behavior that applies to properties;
• identifying the characteristics (supply and demand) that affect the creation of value in that market area;
• developing a model structure that reflects the relationship among the characteristics affecting value in the market area;
• calibrating the model structure to determine the contribution of the individual characteristics affecting value;
• applying the conclusions reflected in the model to the characteristics of the property(ies) being appraised; and
• reviewing the mass appraisal results.

Before appraisals begin, the appraisal district compiles a list of taxable property. The list contains a description and the name and address of each property owner. In a mass appraisal, the appraisal district then classifies properties using a variety of factors, such as size, use, construction type, age and location. Using data from recent property sales, the appraisal district appraises the value of typical properties in each class.

Three common appraisal approaches appraisal districts may use are the sales comparison (market) approach, the income approach and the cost approach.

Sales Comparison (Market) Approach

The sales comparison (market) approach bases value on sales prices of similar properties. It compares the appraised property to similar properties recently sold, then adjusts the comparable properties for differences between them and the appraised property. When adequate sales data is available, the sales comparison approach is typically preferred in appraising single-family homes and vacant land in mass appraisal.

Income Approach

The income approach uses income and expense data to determine the present worth of future benefits. This approach seeks to determine what an investor would pay now for a property based on its anticipated future revenue stream. The income approach is most suitable for properties frequently purchased and held to produce income, such as apartments, retail properties and office buildings.

Cost Approach

The cost approach bases value on what it would cost to replace the building (improvement) with one of equal utility. Appraisal districts apply depreciation and add the estimate to the land value. The cost approach is best for appraising properties for which sales and income data are scarce, unique properties and new construction.