Assessments vs. Appraisals

Merri Ann Simonson

Wondering what to do about that surprise property tax assessment you received in your mail last month? Coldwell Banker’s Merri Ann Simonson has written up a concise explanation of how Tax Assessments differ from Appraisals & Market Value, and it might answer some questions you have about it:

Real Estate Market and Your Tax Assessment

All of us Island property owners recently received our tax assessment notices from the County. As agents we have been fielding many questions about the statements and new assessments. As stated in several articles in the on-line newspapers, the State has mandated that our Assessor’s office convert to an annual assessment update cycle versus the three year cycle we were on for years. This change-over was a large conversion and produced values that alarmed some property owners. This year’s values were a new approach to the process for our County and that coupled with the fact we are in the trough of a real estate market correction, made the process more challenging. The current values are for a one year period only and will be adjusted next year, so the process will become more stable and refined. Further, this will be a much more accurate system than we have had in the past.

As agents, we have seen properties sell above their tax assessments the majority of the last 20 years with the exception of the last 3-4 years. There was even a shorter period when the assessor’s values were equal to what properties were selling for. For example, back in 2006, many of the same type properties sold in an average range of 125%-150% over their tax assessments. During the recession, many properties sold in an average range of 15%-30% below their tax assessed values. These average percentages varied based on the type of property but generally that was the trend. The handful of very high-end homes that sold during the recession were so custom that the percentages varied wildly so they were not included in the average ranges cited above. With the new adjustments to the prior assessed values, we most likely will note sales slightly above the tax assessed values but that will only be proven over time and with future sales.

Most of the confusion around the new tax assessments stems from the purpose and process of the tax assessment versus market value of our properties. The assessor is required to value properties for tax purposes at market value. The valuation assigned by a REALTOR for the purpose of marketing or the value assigned by an appraiser for the purpose of lending will be different. The process to the valuation is also different. Generally, the differences in the process are described below:

Appraiser and Agents:
Conducts an interior inspection then identifies at least 3 or more truly comparable sales that are recently closed that they either physically inspect or at minimum view via photographs in the Northwest Multiple Listing Service. Ideally closed sales should be less than 90 days old. They spend much more time on the property determining the desirability based on the features and amenities. They also rely upon a cost approach but a depreciation figure is deducted based on the age of the home and it’s condition. They base the value of docks at market as compared to the assessor’s office that only uses the cost approach.

Finding truly comparable property sales in our County has always been the challenge but due to the recession and low level of sales, these last few years have been much more difficult. An agent even differs from an appraiser as we can actually use “Pending” transactions as comparable sales. We also consider the current level of similar inventory and absorption rate in the category to assist in pricing a property for the current market for our clients.

Assessor’s Office:
The assessor’s office performs appraisals for purposes of ad valorem taxation. This is part of the process for how we provide funding to all local government services, including schools, libraries, ports, fire districts, the hospital district, emergency medical services, cemeteries, state schools, parks, roads, sheriff and government.

Appraisers that work in the assessor’s office have access to the exterior of the improvements only, unless invited in by the property owner or unless they inspect the home while under construction. A “blanket” approach with comparable sales from the immediate neighborhood, district or region is used. Waterfront to some extent is a separate neighborhood. It is impossible with the size of our County, and the size of our assessor’s staff to physically inspect every property on an annual basis, therefore the “blanket” approach is the most efficient option. The Legislature has required all Counties to use this method by 2014. Properties will be physically inspected every 6 years from now on. Since the Notices of Value mailed in November were based on a January 2012 assessment date, our Assessor’s office utilized sales from 2011 and the first half of 2012 only. Those sales were reviewed and the percentage of decrease from the last valuation for those properties was determined and averaged. That average percentage was then applied to the neighborhood accordingly. Sales that occurred in the second half of 2012 will be recognized in the 2013 valuations.
Due to the change towards an annual adjustment and the limited number of recent sales, this year was a very “broad brush” approach to the adjustments.

The Assessor’s office is required to assess at market value but with the constraints cited above, the task is quite different as compared to an agent or appraiser. Again, the value is for tax purposes, not for marketing or lending. The assessor is not allowed to be a member of the Northwest Multiple Listing Service and use their database, although he has asked to become a member. Nevertheless, in accordance with the Uniform Practices of Professional Appraisal Practice (USPAP) the assessor’s office does have access to the listings and does consider listings as being near the upper end of the market values.

The variance between the tax assessment and the values produced by appraisers and agents is expected as the process defines it.

Appraisers do not rely upon the tax assessed value as an approach to their valuation at all. The uniform reports don’t even request the appraiser to provide the assessment information. The appraisers never compare value conclusions with the Assessor’s office therefore they are not influenced by the assessments. Their assignment is to provide market value to the lender not the tax assessed value. It is also important to note that appraisers can and do provide opinions of value as of any given date; the assessor’s office is required to value property as of January 1 of each year.

Agents are not licensed appraisers and there is no regulation surrounding how they calculate a property’s value; there is no uniform calculation. Some agents use the assessed values as a benchmark only. They recommend a list price to a client by applying a percentage to the property’s current assessment that is derived from the average percentage of sales price to assessment of similar recent sales. Some agents don’t rely on the tax assessed value at all and don’t let it influence their recommendation for pricing because they know the assessor doesn’t necessarily have access to the interior of the improvements. Regardless of what an agent recommends, the ultimate pricing decision is made by the seller.

Buyers of course are looking for the best price possible and will use the tax assessment when it favors them. They weren’t using it too regularly during the recession but I assume it will become a more popular leverage tool in 2013. As agents we are able to explain to the buyers the difference in the process of tax assessed values and the property’s market approach to value.

Websites such as Zillow, Redfin, and Trulia rely upon the various County Assessor’s information and valuations to process their own calculation. Their values may be reliable in Metropolitan areas where subdivisions of very similar homes are bought and sold on a regular basis, but the website’s calculation of value performs poorly in small, low volume, custom construction markets such as San Juan County. Again, as agents, we are able to explain to buyers that the website calculators are not reliable in our County.

Bottom line, we should all be pleased that our assessor’s office has rarely “lead” the market with their values as that may have equated to some of us paying slightly more in tax. Further we historically have had the lowest levy rate in the state.

Many property owners hoped that because their assessment was adjusted downward that their tax statement this Valentines Day would have a downward adjustment based on the same percentage. This is not necessarily the case. The 2013 levy rates will be adjusted to insure that local government property tax revenue is met. This complies with Washington State laws that were formed for the sole purpose of insuring that local government can rely upon a predictable amount of revenue each year so they could process a balanced budget. If the tax revenue had large fluctuations the result would be chaos for the local government services.

Real Estate News From . . . .

Merri Ann Simonson
Managing Broker
Sales Manager
simonson [at]sanjuanislands . com

105 Spring St./P.O. Box 100, Friday Harbor WA 98250
(800) 451-9054/(360) 378-2101

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