To find the value of any piece of property, the assessor must first know what properties similar to it are selling for, what it would cost to replace it today, how much it takes to operate and keep it in repair, what rent it may earn, and many other factors affecting its value, such as the current rate of interest charged for borrowing money to buy or build properties like yours.
Using these facts, the assessor can then go about finding the property's value in three different ways:
Sales Comparison Approach
The first method compares your property to others that have sold recently. These prices, however, must be analyzed very carefully to get the true picture. One property may have sold for more than it's worth because the buyer is in a hurry and would pay any price. Another may have sold for less than it was actually worth because the owner needed cash right away and the property was sold to the first person who made an offer. When using the sales comparison approach, the assessor must always consider such overpricing and underpricing and analyze many sales to arrive at a fair valuation for your property. Size, time, quality, condition, and location are also important factors to consider.
Cost Approach
A second way to value your property is based on how much money it would take, at current material and labor costs, to replace your property with one similar. If your property is not new, the assessor must also estimate how much value has been lost to wear and tear or other factors such as obsolescence. The adjustment called depreciation is then deducted from the replacement cost. Finally, the assessor estimates the value of your lot and adds this to the depreciated cost to arrive at the total property value.
Income Approach
The third way is to evaluate how much income your property would produce if it were rented as an apartment house, a store, a factory, etc. The assessor must consider operating expenses, taxes, insurance, maintenance costs, and the return most people would expect on your kind of property. The net income from the operation of the property is then capitalized into a value estimate by using a rate that provides a return on and off the property investment. This method is seldom used to appraise single-family residential properties. The City of Salem uses this approach on income-producing properties such as offices, shopping centers, apartments, and like properties.