​Supervisors should exercise care in the valuation of single family residential property that is income producing. The proper determination of highest and best use for such property will be critical to the method of valuation used and the selection of comparable properties.

The highest and best use of single family residential property is typically a use that is consistent with the surrounding neighborhood. A single family residential property located in a neighborhood that is predominately owner-occupied would normally be valued based on cost and sales data from the neighborhood, adjusting the differences among the properties. The fact that an individual property may currently be rented would not alter the likelihood that the property, if exposed to the marketplace, would compete with the other similar owner-occupied properties in the neighborhood.

Generally, the sales comparison approach has broad applicability and is persuasive when sufficient data are available. It usually provides the primary indication of market value in appraisals of properties such as houses which are not usually purchased for their income producing characteristics. Buyers of income producing properties usually concentrate on a property’s economic characteristics, most often focusing on the rate of return for an investment made in anticipation of future cash flows. 1/

If the analysis of highest and best use results in a conclusion that the rental property is and will continue to be used as an income producing investment property, the valuation approaches may differ from owner-occupied properties. An income capitalization approach can be considered if a sufficient quantity and quality of data can be obtained relative to rents, income, and expenses. A sales comparison approach may be used if the sales are comparable and adjusted for differences. Sales of owner-occupied homes and rental homes may reflect two different markets. The cost approach should reflect all forms of obsolescence. Many older single family rental properties have problems relating to lead paint that will affect property value.

1/ Appraisal Institute, The Appraisal of Real Estate, 11th ed., (Chicago, 1996) p. 339.​​