What Determines Property Value?

Property ValuesWhat determines property value? That’s a good question that gets a couple different answers depending whom you ask.

For people who want to sell their home, the property value is what a ready-and-willing-and-able buyer is willing to pay for the house. It’s a number that’s typically calculated by looking at comparable homes in the neighborhood which sold recently.

Similarly, when a municipality is figuring out property values in order to assess taxes, their assessor may also check properties which are similar nearby in order to value residential, vacant and/or farm properties. For example, if a nearby ranch home with 3 bedrooms built in 1979 with a two-car garage and a fireplace is just like your house and it sold for $150,000 a month ago, then it’s likely your house is worth about the same. Assessors may also use the cost or income approach to figure out property value.

The cost approach to determining property value equals the cost to replace a structure with a similar one using today’s labor and material prices, minus depreciation and plus the market value of the land it’s on. This cost approach is typically used to find industrial, utility and special purpose property values.

The income approach includes an analysis of how much income a property will produce if rented, taking into account things like maintenance costs and operating expenses.

Meanwhile, assessors may use computer assisted “mass appraisal” techniques in order to estimate values.

One other major factor that plays a role in determining property value is supply and demand of land in an area. Certain neighborhoods are more desirable than others for a number of reasons, and since land is in limited supply, its price mostly increases over time. Therefore, a home bought in East Amherst in 1970 for $50,000 might be worth $500,000 today simply because that area has built-up and become a bustling place where people want to live. Land underneath a structure doesn’t depreciate (for tax purposes).

So property values are typically determined by the land where they’re at coupled with figuring out how much similar structures have been selling for in recent times.