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But It’s Assessed Value is…

cartoon house with treesAs a professional real estate broker, assessed value is one of the more difficult concepts to explain to both buyers and sellers, because the assessed value is so often considered to be an official third party valuation of a property’s worth. To some extent it is, and then again it isn’t. The complex relationship assessed value has to the market value of a property isn’t nearly as straight forward as most people think. Let’s try to sort this out…

The first question we really need to address is: “What exactly is the assessment?”

Is it (A) The mechanism used by the county or a municipality to raise sufficient revenues to help off-set the collective budgets of its various governing bodies by distributing the burden over property owners in the form of a tax levy; or (B) Is it a government-calculated “official valuation” of individual properties within the county’s boundary?

If you chose (A) you are correct. But if you chose (B) you would be in good company because most people believe that the property’s assessed value is some kind of official “ruling” on what the property’s market value should be. The truth of the matter is, market value is determined by what someone is willing to pay for a certain property. It may be that one person is only willing to pay the assessed value for the property, but if another person comes along and is willing to pay 120% of the assessed value, that amount establishes the market value of the property. Likewise if they are only willing to pay what amounts to 85% of the assessed value, that too becomes the market value.

But “Wait!” you say, “how do they come up with an assessed value if that isn’t the actual value of the property?”

Good question: here’s my understanding of it all. First, though, before we get to assessed value, let me explain what the property’s man with hand on his forehead“appraised value” is. Let’s establish from the start that assessed value and appraised value are two different things and serve two different purposes. Again the assessed value is a mechanism to collect revenue while the appraised value is a process to estimate a fair market value for a property. Banks use the appraised value (not the assessed value) to get a supportable estimation of the market value of a property before they loan money to buy it. So, Assessed Value is to Tax Collection what Appraised Value is to Market Value.

All property ultimately sells at its market value. An appraised value is an estimation of market value. Because market value is only established after a sale, the appraised value is about as close as we can get to a market value prior to a sale. There’s another valuation that is often used called a Broker Price Opinion or BPO. Appraisals are performed by licensed appraisers; BPOs are performed by licensed real estate brokers (like me) and licensed real estate agents. As a broker, I use the same concept of comparable sales that appraisers use, although our methodology for arriving at a final number is different. Both are effective…they are just different.

Another way of looking at it is this: To determine an assessed value, they start out with how much revenue they need to raise and then they figure out how to divide up the burden between property owners. With appraised value, they start out with the quality and location of the home and by using comparable home sales, i.e. market values, they estimate what they think the home might reasonably sell for. The objective of assessments is raising money. The objective of appraisals is estimating a probable market value.

I don’t want to beat this to death, but…

It is critical to understand that these two concepts—assessed value and appraised value—do not:teacher standing in front of blackboard

  1. Have the same purpose,
  2. Use the same methodology, or
  3. Produce an interchangeable result.

Ok, that being said, how do they go about determining the assessed value of a property? Well to begin with, they don’t typically go from property to property each year performing on-site inspections to arrive at a property’s assessed value. To be fair, there are situations where assessors do make on-site inspections, but typically something has to trigger that like a building permit for an addition or remodeling, new construction, etc.  Rather, they assign certain reasonably homogeneous areas, such as a neighborhood, or a collection of similar homes a mass assessment and then they apply their methodology to divide up the total assessment as fairly as possible among the different properties in the area. In so doing they establish the assessed value. Once the basic assessment is established, the system kind of runs on auto-pilot and assessed values are raised and lowered fairly uniformly depending on a number of influencing factors like the state of the economy, movements in general real estate market values, etc.

So for example a condo building would have a single assessed value or building assessment. That assessed value then has to be spread out over individual units within the complex. There are a variety of factors that can contribute to the algorithm the assessor uses to divide up the tax bill, but these things are not typically affected by the individual esthetics or appeal of the unit. More often what is used are measurable data points about each unit, e.g., number of rooms, square feet, location, etc. The reason the data points are used is precisely because it is impractical to evaluate the esthetics of each individual unit for assessment purposes. So level of décor, view, perceived openness, convenience of location, nearness of parking, etc., are not typically factored into the assessed value. But they are factored into the appraised value and ultimately the market value because these values represent how appealing the property to a particular buyer.

Note attached with push-pinNow here’s the critical point:

Appeal is not a data point that can be checked off the list and factored into the assessor’s formula to determine an assessed value. Appeal is an abstract: a highly personal value each potential buyer calculates for themselves. If a property is significantly appealing to a buyer, they may be willing to pay more for that appeal and that constitutes the market value of the home to that buyer. Alternatively, if a property is unappealing to a buyer that would drive down that buyer’s concept of market value. Ultimately, the market value winds up being exactly equal to the price the buyer and seller agreed to.

So, from this we can see that assessed value trickles down to individual units or homes based on four things: 1. The county/municipal budget and need for revenue; 2. The area’s mass assessment; 3. The checklist of data points used to distribute the burden; and 4. Certain economic and market conditions. Assessed value and appraised value are like distant cousins, although all things being equal, the assessed value is typically lower than the market value.

Appraised value, unlike the assessed value, is determined through a complex calculation used by appraisers and brokers to estimate a property’s potential market value. Market value itself is determined by how appealing a buyer finds the property and what he can get the seller to agree to sell it for. One thing to remember: Appraisers and Brokers actually see the home in its current condition. The Assessor may have actually never seen the property because the process he uses typically doesn’t need an on-site inspection.

Here is a plug for using a Buyer Agent if you are planning to buy a property.Buyer and Agent shaking hands

A buyer agent can research competitive listings that have been sold and can share that research with you. (An agent working for the seller cannot do that.) Your buyer agent’s process is very similar to the process an appraiser would use, but your buyer agent will do it for you for free whereas an appraiser will charge you to provide ostensibly the same information. And, when you make an offer, your bank will require a new appraisal, even if you paid for one just days or weeks before. Guess who pays for both of those? (Hint: It isn’t the bank.) Talk this over with your agent and he or she will explain the economies of buyer agency to you.

Is Assessed Value Helpful to Buyers in Any Way?

Short Answer:

Yes, but…

Long Answer:

Math puzzleThe area assessed values can be helpful for real estate brokers to calculate a constant value that can be used for mathematically comparing home prices and to some extent to predicting potential list and purchase prices. Constants are things like square feet, in that a square foot is always 144 square inches whether it is a square foot in a house or on the moon: that’s what makes it constant. The assessed value is, in large part, derived using pretty much the same criteria from house to house in the same assessment area. Typically, the assessor uses the same methodology on each house in the area as he assigns the tax levy, and it is that consistent methodology that can give assessed values the quality of a constant.

Okay…So what?

Well, just like you can divide list and sold prices by the constant of square feet to get a dollar per square foot value, you can build a Got-the-idea man with light bulb going onreasonable constant by dividing the list or sold prices of individual properties by their respective assessed values. This gives you a set of ratios between prices and assessed values. By averaging these ratios together you can calculate a constant value you can use to compare list or sold prices in the same area. Because several things can affect an individual assessed value, the more homes you can include in your sample the more ratios you can average together, and the more useful the constant will be.

My process gets a little more complicated because I want to provide high and low ranges to make them as predictive as possible for my clients.

If you remember only one thing from this article, remember that while assessed values can be useful in more complex real estate analyses, they are not in and of themselves a good predictor of market price. Used as a constant, similar to square feet, they can be useful in comparing properties and in concert with other measurements, they can be used to evaluate list prices and estimate ranges of potential selling prices.

At Nelson & Associates we use Advanced Analysis Techniques to give both Buyers and Sellers a Strategic Advantage!

Understanding assessed value and pricing is the strategic edge we bring to our clients, both buyers and sellers. Going well beyond the “educated guess” we will analyze your market and to give you the best possible advice for your buying and selling decisions. Want to know more about assessed value? Contact us today!

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