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How Appraisals And Assessments Differ
By Raynor James, Fri Dec 9th
Many people think appraisals and assessments are the same thingor at least that they should be for the same amount. The truthis they can vary greatly. Let's look at each of them. Appraisals An appraisal is an estimate of market value. An appraiser canuse many methods for coming up with this estimate. For incomeproducing property, the appraiser may capitalize the value ofthe income stream. (It would take "x" dollars of capitalinvested at a "y" rate of return to produce an income equal tothe rental income generated by this property.) For otherproperties, an appraiser may use "replacement value." (It wouldcost "x" dollars to build this structure if it were being builttoday.)
Appraisers usually use "comparable sales" when evaluating themarket value of a home. They look at nearby properties withsimilar characteristics, which have sold in the recent past tosee at what price they sold. They typically give the most weightto the property they deem to be most like the property they areappraising. Buyers and sellers generally encounter appraisals when thebuyer's lender has an appraiser make an evaluation of the marketvalue of the property being sold. The lender wants to be sure ofthe value of the collateral for the loan. An interesting featurethat comes into play in this situation is that one indication ofvalue is at what price two unrelated parties will agree to buyand sell the same property. In other words, what is the contractprice the seller and buyer of this property agreed on (if theyare not relatives). Assessments An assessment is the value your local government puts on yourproperty for the purpose of taxing it. How this value is derivedvaries from jurisdiction to jurisdiction. Some communities saythe value is the same as market value.
Some say the value is apercentage of market value. Some appear to actually do what theysay they do, and some do not. I was once a partner in an investment property that we wereoffering for sale at the time the county re-assessed it. Imaginemy annoyance when the assessment came in at one hundred andforty percent of the offer price. We weren't dummies. Thepartners were real estate professionals. I appealed there-assessment, but my appeal was turned down. I offered to sellthe property at the assessed price to the appraiser the countyhad hired to handle the appeals when he was telling me why hecould not reduce our assessment. He did not take me up on myoffer. Our property sold at the listed price months later. Wehad paid six months' taxes on the property at a higher thanmarket value. On another occasion I helped some elderly people sell a farmthey'd lived in all their adult lives. The farm sold for a pricea great deal higher than the value at which it had been assessed. I believe the two examples are fairly typical. Manyjurisdictions will "puff up" assessments for businesses andinvestors and "low ball" assessments for people who have livedin their homes for a long time. Sometimes there are formulas fordoing this. "Land use" is one such concept, i.e., the propertyis taxed at its value as a farm and the fact that it is ripe fordense residential and commercial development is ignored ordeferred. Sometimes there are no formulas. It is just done. For these reasons, it is usually not a good idea to put too muchcredence in the assessed value of a property when you are tryingto figure out market value. They may be the same. They may bevastly different. About the author:Raynor James is with http://www.fsboamerica.org - homes forsale by owner. Visit our "sell my home" page athttp://www.fsboamerica.org/seller.cfm to sell your own homeyourself with a free 1 month listing.
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