Valuation Principles, Mass Appraisal, and Approaches to Value
Valuation Principles, Mass Appraisal, and Approaches to Value
This domain tests how assessors estimate true cash value and how mass appraisal differs from single-property appraisal. Expect definitions of highest and best use, the three approaches, depreciation, and capitalization, plus questions about model calibration and sales validation.
Core rules
- True cash value is the usual selling price in an arm’s-length transaction, not a forced or distressed price. Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive.
- The sales comparison approach adjusts comparable sales for differences in time, location, size, quality, condition, and property rights. In mass appraisal, assessors use CAMA models, market areas, and calibrated coefficients rather than a narrative appraisal for each parcel.
- The cost approach estimates replacement or reproduction cost new, subtracts physical deterioration and functional/external obsolescence, and adds land value. It is strongest for new or special-purpose property.
- The income approach capitalizes net operating income (NOI) by a market-derived cap rate, or applies a gross income multiplier. It is central for apartments and commercial property.
- Mass appraisal requires uniform data collection, ratio testing, and periodic recalibration; mass does not mean unsupported.
Worked example
A small apartment building produces effective gross income of $120,000 and operating expenses of $48,000, so NOI is $72,000. Market cap rate evidence supports 9%. Indicated value is $72,000 ÷ 0.09 = $800,000. At the 50% assessment level, assessed value is $400,000. If the property’s capped taxable value is $350,000, the tax bill uses $350,000, but the valuation and equalization analysis still starts from $800,000 true cash value.
Traps
Do not apply a residential gross rent multiplier to a commercial property. Do not subtract debt service when calculating NOI. Do not mix assessed value, SEV, and taxable value in one calculation. In mass appraisal, a model that is statistically neat but uses invalid sales is still wrong.