Texas Property Tax Consultant Practice Exam

Which method is used to estimate property value?

1. Situs, depreciation and prices per square foot of improvements

2. Age/life method, historical cost, replacement cost new

3. Sales comparison, income capitalization, and cost approach

4. Principle of substitution, supply and demand, Principle of balance

The correct answer is: Sales comparison, income capitalization, and cost approach

The sales comparison, income capitalization, and cost approach are widely recognized methods used to estimate property value, each serving a different purpose based on the context of the property. The sales comparison approach involves evaluating similar properties that have been sold recently in the same area. This method is grounded in the principle of supply and demand, relying on the market's behavior to assess value. The income capitalization approach is particularly relevant for investment properties. It estimates value based on the income the property can generate, projecting future cash flows and then discounting them to present value, thus determining how much an investor might be willing to pay for the property today. The cost approach evaluates the value based on what it would cost to replace or reproduce the property, accounting for depreciation. This method is useful, especially for new properties where comparable sales data may not be readily available. In comparison, while other choices contain relevant concepts and methodologies, they do not consolidate the three widely accepted approaches that are specifically designated for estimating property value as effectively as the option selected.