When using the income approach to value properties, BCAD is required to follow a specific formula:
They must calculate Net Operating Income (NOI) based on actual or market-supported annual gross rent income, subtract reasonable operating expenses, and then apply a capitalization rate (cap rate) to estimate fair market value.
Operating expenses typically account for 25%–50% of gross income for single-family rentals. These include but are not limited to:
In rural Texas, a typical cap rate for single-family rentals ranges from 7% to 10%, depending on risk and demand.
Where It Goes Wrong:
Unrealistic Rent Estimates: If BCAD is assuming high rents without providing lease evidence or comparable rental data, they're likely inflating the value.
Ignoring Real-World Expenses: If BCAD fails to deduct appropriate expenses, the net income and consequently the appraised value, will plausibly be exaggerated.
Aggressive (Low) Cap Rates: If BCAD applies an unusually low capitalization rate without clear justification, it could result in an inflated assessed value. This is because, under the income approach, a lower cap rate mathematically increases the property's estimated value, potentially leading to higher property taxes that may not accurately reflect true market conditions.
Can They Use More Than One?
The Texas Comptroller's Appraisal Manual advises a CAD to pick the most appropriate method. They can reference other methods for support, but they should not combine them in a way that inflates the value unfairly. Additionally, the Texas Comptroller's Appraisal Manual even warns against mixing methods in a way that leads to double-counting.
Conclusion
These properties are still significantly overvalued, no matter which method is used, and even when actual annual gross rental incomes are factored in the calculations. If you're unsure which valuation method BCAD uses for your property, ask them. You have a right to request documentation.
Where is the support for this valuation?
What expense ratio or cap rate was applied, if applicable?
Is there a worksheet or evidence to justify BCAD assumptions?
