Q: I know that the city appraises a house for tax purposes. Is this the same method that banks use to appraise homes also?
A: There’s a lot of confusion about the value estimates that cities generate for homes, so this is a very astute question. A city’s process of estimating the value of a home for purposes of calculating property taxes is usually called a tax assessment, though some cities do call it appraisal. We’ll use assessment for clarity’s sake to denote a city’s value estimation.
In most areas, property taxes are calculated on an ad valorem, or "according to value," basis.
For example, in a place with a 1.25 percent state property tax, each county tax assessor has the job of assessing the value of each home, then imposing a tax of 1.25 percent of each home’s value every year, plus local or neighborhood assessments, minus any discounts or exemptions applicable.
Very generally speaking, both cities and mortgage lender appraisers consider the recent sales of comparable homes within a nearby radius of a home as the basis for their opinions of that home’s value. But that is a massive oversimplification, both of the assessment/appraisal method, and of the similarities between how assessors and appraisers operate.
For purposes of this post, let’s assume we’re discussing bank appraisers’ methods when they are appraising a home for purchase, not giving a bank an estimate of a home’s value for purposes of a loan modification, short sale, or to set the list price of a foreclosure.
Appraisers are paid to answer the bank’s question regarding whether it could currently resell that home for the price the buyer and seller have agreed to. As such, appraisers work from the purchase contract and its agreed-upon sales price and any seller concessions to repairs or closing costs.
With that information, and other data about whether the sale was distressed at all (e.g., foreclosure or short sale), the appraiser looks primarily at multiple listing service data about homes with very similar numbers of bedrooms, bathrooms and square feet that have sold within a half-mile radius, and within the last few weeks. Appraisers will expand the radius and the time frame of the search if they can’t find at least three to five comparables homes ("comps") to use.
Next, the appraiser visits the site of the home, usually taking both interior and exterior photos, assessing things like the general condition of the home (so as to compare it against the norm for the area), and also checking for any safety hazards that the bank should require be repaired prior to close of escrow (e.g., broken windows, exposed electrical wires, massive wood rot or unsteady decks).
Then the appraiser goes back to the office and does a property-by-property comparison of the "subject" property against the individual comparables, adding or deducting dollars from her opinion of the home’s value accordingly when the home is more or less valuable than the comparable, for any reason, like this comparable is newer than the subject property, or that comparable isn’t in as good a level of repair as the subject home.
On the other hand, there are generally only a few times a home is assessed for property tax purposes. Most often, homes are reassessed when they change hands — i.e., when they are sold. And they are generally assessed by default to the value that was paid for them, when they are sold between strangers on the open market, so there’s no analysis of comparable sales or site visit that goes on in those cases. The fair market value is assumed to be what a qualified buyer is willing to pay for the home, as shown by what the buyer did in fact pay for the home.
In some states, the assessed values were assumed to rise every year, up to a certain maximum — for example, in California, assessed values rise up to 2 percent automatically — until the market crashed. Now, county assessors in almost every state are adjusting assessed values annually on the basis of comparable sales, as reported by the county sales records.
In a few areas, homes are actually subjected to a drive-by site visit from the tax assessor every three or four years, mostly to check the condition of the home so they can more precisely compare it to the homes that were recently sold.
There are really only two other common occasions for a home to be reassessed by a city. First, when a homeowner feels that their home’s assessed value (and, thus, property taxes) is too high, they can petition for reassessment due to declining market values and, you guessed it, offer recent comparable sales supporting the lower value they feel the home has on the current market.
Lastly, when a homeowner obtains construction permits and improves his or her home, the home is often reassessed upwards to account for the increased value after the upgrades or remodeling. In these cases, comps are not the primary driver of value; rather, the assessor assigns a value to the additional square feet or amenities added.
