Appraisal vs. Assessment vs. Web Evaluation Tools
Each type of real estate valuation professional uses a different approach. Here is a summary of the differences:
Licensed Appraisers are hired by banks and mortgage companies to determine if the loan that the Buyer is requesting is justified by the current market value of the property. They determine “market value” by using 3 methods and then deciding which method is most appropriate for the type of property they are valuing. The 3 approaches are:
- Comparable sales (known as “comps”) in the area. Using recent sales of comparable properties, they make “adjustments” to the sale price of those properties (e.g. if a property has an extra bathroom, they may add $15,000 to the price of the comp), which they add or subtract, to come up with the predicted market value.
- Cost to rebuild the property. Appraisers find sales of land in the area. Once they value the land, they add the estimated cost to rebuild the property as one measure of the “value.” This approach is not widely used because land sales are very rare.
- Income approach. This is most often used when evaluating rental properties. Appraisers take the estimated rental income, using rental comps, and multiply it by a “gross rent multiplier.” The gross rent multiplier is determined by looking at the ratio of rental income to the sales price of comparable properties. This approach is not widely used because rental properties are generally worth more than their gross rent multiplier when they are converted to condominiums.
One downside of appraisals is that they sometimes don’t make adjustments for amenities to which buyers would react favorably, like cathedral ceilings, unusual types of granite or energy-efficient features of a home.
City/Town Assessors assign a value to every property in their area using square footage, the number of bedrooms and a prediction of the interior condition based on the exterior if they are not able to get access.
The assessed value is then multiplied by the tax rate which is set yearly by the City/Town, to come up with the amount of real estate taxes that the Owner must pay annually. Assessed values are not particularly accurate because most of the time the Assessor has not had an opportunity to see the interior of the property and therefore, make adjustments for the condition.
Buyers, especially if they are from out of town, rely on the assessed value when trying to figure out how much to offer on a property. We advise our Buyers to only use the assessed value to decide whether the taxes for the property are likely to increase. In other words, if the assessed value is considerably lower than the selling price of the property, then it is likely that the taxes for that property will increase at some point in the future. Please note that assessors are not allowed to automatically adjust the assessed value to meet the sales price when a property changes ownership. Assessed values are generally increased or decreased for entire classes of property (like condos or single families) on an annual, biennial or triennial basis by the City/Town.
On-line Web Evaluation Tools like www.Zillow.com pull data from the public records like the assessor’s database. The property values that they provide are only based on interior and exterior square footage, number of bedrooms and baths and other data that the City/Town captures. No one at these web-based companies has ever set foot in the properties they are valuing. Therefore, there are no adjustments for renovated kitchens, air conditioning, and other amenities that influence value. Web tools can be helpful for getting a ballpark estimate but know that properties sell for considerably more and less than these tools predict.