What Determines Assessment
Fair market value of a property determines the assessment, that is, the price most people would pay for it in its condition as of the assessment date. The best indicator of fair market value is market activity. Buyers and sellers create market value by their transactions. In an appeal, the best evidence of market value is sale price, the sale price of the subject property or of similar properties (called comparables).
However, sale price is not necessarily the same as market value. The assessor carefully examines all sales, qualifies the sales, and adjusts them for special circumstances that might decrease or inflate prices. An owner in a hurry to sell might sell for less. If the seller includes substantial personal property in the sale or provides discounted financing the sale price is likely to be inflated. Although the sales comparison approach is not the only approach used (cost and income approaches are two others), comparable sales are recognized by courts as the best evidence of market value. Residential taxpayers who appeal successfully usually do so by finding comparable properties that have lower assessed values or that have recently sold for less than the assessed values.
Many taxpayers are confused at increases in assessed values because the property has not changed. But physical change is not the only reason for a change in property value, the market is. If a town's major industry leaves, property values collapse. Conversely, as decaying neighborhoods with good housing stock are discovered by young homebuyers, prices gradually rise, and then soar as the neighborhood becomes fashionable. A shortage of detached houses in a desirable neighborhood can send prices to ridiculous levels. In a recession, larger homes may stay on the market for a long time, but two-bedroom condominiums are in demand, so their prices rise. In a stable neighborhood, with no extraordinary pressure from the market, inflation increases property value.
Homebuyers, home sellers, bank appraisers, real estate analysts, and the assessor all pay attention to the same market factors in valuing property.