Expert’s Comparable Sales Approach Rejected for Rental Property
In a recent trial before the Tax Court, a taxpayer’s appeal challenging the assessment was unsuccessful due to the taxpayer’s failure to overcome the presumption of correctness. As mentioned many times on this blog, the burden of proving that the assessment is erroneous is on the taxpayer. To overcome that burden, the taxpayer must present credible evidence before the Tax Court that raises doubt as to the validity of the original assessment.
In Kolker v. Chatham Borough, the plaintiff appealed the assessment of a two-family dwelling which was utilized as a rental property. At trial, the taxpayer’s expert relied on the sales comparison approach to value the subject property, and provided comparable sales of other two-family dwellings utilized as rental properties. The expert testified that the comparable sales were researched via online sites, and he confirmed the information with the municipal offices as to each sale. The expert thereafter made the appropriate adjustments and reached a value conclusion as to the subject property.
The Tax Court raised an issue as to whether the comparable sales chosen by plaintiff’s expert were properties legally permitted to be used as rental properties. The court was reluctant to accept the expert’s testimony as to the facts of the comparable sales given that the information was solely and primarily obtained through online sites. In addition, the websites relied upon by plaintiff’s expert did not provide any of the income information regarding the rental properties. Given that the comparable sales were all rental properties, an investor/purchaser of the property would have sought the potential rental income from the property prior to the purchase. Without the income information, the court found the plaintiff’s expert’s comparable sales approach did not accurately reflect the market value of valid rental properties. Suggesting that the income approach may have been more helpful, the Tax Court stated that “an analysis under the Income Approach to value may have been useful to corroborate the expert’s conclusion under the Sales Approach.”
Determining the highest and best use of a property is one of the first steps in valuation. If one is to argue that the highest and best use of a property is to be a rental property, the comparable properties should fall in the same category. However, if it appears, as it did in this case, that the use of the property as a rental may or may not be a legally permitted use, the court will be less reluctant to give much credence to the evidence. Furthermore, using only the sales approach on an income-producing property turned out to be a fatal oversight by the plaintiff’s expert in this case.
