Ask Kathy: Don’t be haunted by your home’s value

Kathy McSherry

Hi Kathy:

My bank has a property value assessment feature that is updated every month. Last month the bank stated the home market value as $666,400 and the tax value as $604,586. How are these values determined and how reliable is the market value estimator?

—Timothy S.

Hi Timothy:

I have often asked myself that same question. First, let me differentiate between assessed value and market value. Assessed value typically refers to a percentage of the appraised value of your home that will determine your property taxes. The market value refers to what your home might sell for and is typically the number used if you were to list your home. Assessed values tend to be lower than market values.

Market value estimators used by banks or online sites take advantage of publicly provided data and run it through computer models and possibly an algorithm to derive at their estimated value. This is typically proprietary information and comes from many sources like the MLS and public records. According to Stan Humphries, chief analytics officer at Zillow, the margin of error is 7.9 percent, but varies by location.

To us, the homeowner, we may receive tax information about our properties from the County Assessor’s office or website information and are shocked to see the assessed value less than the market value. One wonders if the “assessor” is blindfolded and slinging darts at a board to establish these values. Such is not the case. Property taxes get assessed based on the price that was paid for the home. (Remember my article on Prop 13 a few months ago?) When a property transfers ownership, a new assessment is triggered. The County Assessor is not driving by your home and evaluating on a regular basis, rather he gets “triggered” to reassess based on new ownership.

One of the true ways to establish the value of your home is to hire a licensed appraiser. This would provide you with an appraised value. Appraisers have been professionally trained to compare, discriminate and adjust the value of your home based on square footage, surrounding comps, and any upgrades or features that would add or subtract to the property’s value. However, it is still an opinion. You could call three appraisers and obtain three different outcomes. Appraisers may also factor in replacement cost, which would include the land and the cost to replace the structure as well as price per square foot. Lenders use appraisals to protect their mortgages and therefore the appraisal value should be fairly close to market value.

Most homeowners do not order appraisals out of the blue. They wait until they are ready to sell their home, and then appraisals are ordered by the lender for the buyer. Lenders are not allowed to speak to the appraiser directly as they are not allowed to influence their decision. Ever since the market crash and the housing recession, strict guidelines were put into place to prevent underhanded deals where someone involved in the transaction could influence the value of a property so that they could obtain a loan or take money out of the property without the real value being there.

To recap: Fair market value is fair value that someone would want to pay for your home today, or the most probable price that a particular parcel will sell for in an open competitive market. It is based on the forces of supply and demand.

Assessed value is based on the purchase price of a property for property taxes. Here in California, it is 1 percent of what the purchase price plus any special bonds or assessments. The County Assessor’s office is in control of this. Taxation is its sole purpose.

And appraised value is based on the opinion of a qualified appraiser to be used privately by a homeowner, or by a lender to assess a value upon a parcel of property.

All in all, fair market value is what a qualified, knowledgeable, and able buyer is ready to pay an otherwise knowledgeable and able seller. Hope this helps Timothy!