When we started this blog, we wrote a post summarizing the three valuation approaches recognized by North Carolina law. We followed up with a post about the cost approach and another one about the income capitalization approach.
In brief summary, North Carolina courts have consistently concluded that the cost approach is best suited as a secondary approach. By inference, that means the primary approaches are the sales comparison approach and the income capitalization approach. But the income capitalization approach can only be used when the property being valued is one that is rented out by its owner, thereby generating income. That leaves the sales comparison approach as the primary approach for most properties that are not income producing.
The sales comparison approach determines market value of a particular property by searching for sales of other properties that are reasonably comparable and adjusting those sales prices to account for any substantive differences. As long as there exist sales of properties close-in-time to the valuation date that are reasonably comparable to the property being valued, the sales comparison approach provides a direct window to market value.
By way of example, if the property to be valued is a single family house with three bedrooms, two bathrooms, and a garage, then the easiest and most accurate way to determine its value is to look for sales of single family houses with three bedrooms, two bathrooms, and a garage. Assuming you can find such sales, those sale prices serve as a starting point for determining fair market value of the property to be valued. But they don't serve as an ending point. A good appraiser will take care to note substantial differences between the property to be valued and the comparable properties. When were they all built? Have there been remodels? Is the square footage similar? What about the finish? Is there additional acreage to worry about? If there are differences in these or other factors, the appraiser needs to adjust the sales prices (up if the comparable properties are inferior and down if they are superior) to accurately reflect market value of the property being valued.
As we've said repeatedly, the valuation approach being used is a key element in any property tax appeal. If your property is an income producing property, then you should make sure that the taxing jurisdiction based its assessment on a market-based income capitalization approach and that your appraiser does the same. If your property is not income producing, you should make sure that the taxing jurisdiction and your appraiser bases their assessment/appraisal on a reasonable sales comparison approach. Only where neither the income nor the comparable sales approach can be applied should the assessor and the appraisal resort to the cost approach as their principal method for estimating fair market value.
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