Tax Assessment vs. Appraisal

10 Replies

Hello BP Community,

We purchased a foreclosure and the appraisal came back with the Tax Assessment at $129,500 and the appraisal price at $85,000. On the appraisal it looks like they used other foreclosures in the area for comp's (one comp sold at $32K). I talked with my real estate agent and he reassured me that it will sell in the $115k+. From what I know/read, the Tax Assessment price is usually a % of the FMV unless you live in CA, we're in Alabama. So I am just trying to see if there is anybody that has gone through a similar situation and what their end selling price was. This may be a common, but this is our first rehab so I feel like we are in unfamiliar territory. Thanks again for all of your comments.

I'm going through something similar right now where my appraisal came in within only $1000 of my tax assessment value.  They also used foreclosures in the comps (which I really don't think you can do) and did not adjust for worse (much worse) neighborhoods of the comps.  I am trying to ask for a second appraisal because I don't think it is the correct representation of the market value for the property but I don't know how it's going to go.  Don't think this helps you but I know what you're going through.  I will follow this post in case anyone has any insight.

Josiah,

Of the two, the appraisal is more likely to be correct. Tax assessments are typically done in bulk and at set times (i.e. once a year, once every two years, once every five years, etc.) Also, like you mentioned, often times they will be low to discourage people from challenging them but since they aren’t a true reflection of the market or situation that is not always the case. What you could do is challenge the assessment with the appraisal but if you aren’t looking to hold the property I doubt that you would care.

I would be concerned that the appraisal could affect a buyer’s ability to get financing. I believe there are situations where you have to disclose if an appraisal has already been performed. I am not really sure how it would work so I will let someone with more experience chime in, but if you have to use that appraisal then the banks will only lend on that amount. Thus, even if your agent can sell the property for $115k your buyer would have to bring a ton of money to the table since the lender will be looking at 80% of $85k. Again, I am just basing that off of wanting to go with another lender once because of a lowball appraisal and being told that it wouldn’t matter because the appraisal would follow me. May be different in your state or your situation, I honestly don’t know so look into that. Otherwise, the property is worth what someone else will pay for it not what it appraises for.

You can challenge the appraisal but that is easier said than done. I am currently working my way through some old podcasts and I believe Podcast #007 (http://www.biggerpockets.com/renewsblog/2013/02/28/ryan-lundquist-podcast-appraisals/) was with an appraiser and he talks a little bit about how you may go about that.

One other point, if the appraisal was “as is” instead of “as renovated” then I would think you should be fine. You should be able to get an “as renovated” appraisal but there may be issues with lender’s who want to see some seasoning before they will accept a new appraisal. A rehabber should have more experience with this, I am mostly a buy and hold guy. If the appraisal was “as is” though, and you bought it as a foreclosure, then foreclosures are the most comparable…right now.

Ed

I agree @Sarah Miller in regards to correct representation. In our report, every comp they used was a foreclosure, and as I stated in my post, they used a comp that sold at $32K which drug the price down. I hope everything works out for you!


@Edward B. , thank you for the response. I am almost 100% sure the appraisal was "as is" so hopefully we will be in good shape. The property was foreclosed on earlier this year for $144K and the properties in neighborhood are in the $115-130K range. I'll check out the podcast that you mentioned. 

Thanks again for your replies

State law in Alabama requires that 25% of all county properties be re-appraised every four years. There is simply not enough manpower to do that. As a result, the counties rely on artificial intelligence software to calculate the appraised values. Often, they are wildly wrong. If the tax appraisal is too high, the property owner protests and gets it corrected. If the tax appraisal is too low, the local government doesn't get the full amount of taxes they could, but when compared to the manpower costs to get accurate appraisals, it doesn't matter.  If a tax appraisal is too low by $50,000, and if the property is owner occupied residential property, then it is assessed at 10% of its tax appraised value.  The taxes might be around 5.5% of the assessed value. So, tax appraisal wrong by $50,000 makes the tax assessment wrong by $5,000, makes the tax bill too low by $275.  It's just not enough money for the county to stress over.

As far as appraisals, the appraiser is allowed to used foreclosures and short sales as comparables if the market is primarily foreclosures and short sales. Here is an excerpt from Fannie Mae rules regarding appraisals and foreclosures: 

"Use of Foreclosures and Short Sales

It is acceptable to use foreclosures and short sales as comparables if the appraiser believes they are the best and most appropriate sales available. The appraiser must address in the appraisal report the prevalence of such sales in the subject's neighborhood and the impact, if any, of such sales. The appraiser must identify and consider any differences from the subject property, such as the condition of the property and whether any stigma has been associated with it. The appraiser cannot assume it is equal to the subject property. For example, a foreclosure or short sale property may be in worse condition when compared to the subject property, especially if the subject property is new construction or was recently renovated. For appraisals that are required to be UAD compliant, the appraiser must identify the sale type as REO sale or Short sale, as appropriate. (For specific information regarding comparable sale adjustments, see B4-1.3-09, Adjustments to Comparable Sales, and for information regarding financing types, see Fannie Mae and Freddie Mac Uniform Appraisal Dataset Specification, Appendix D: Field-Specific Standardization Requirements). "

@Denise Evans , thank you very much for helping me better understand the appraisal process when it comes to foreclosures. I am assuming, after we renovate inside and out, the house will appraise closer to its Tax Assessment amount?

Josiah, there is no way to tell without more information. Ask your real estate agent for comps supporting his/her $115,000 value. Ask for recent sales in the area (because different submarkets have wildly different appraisals for the same house) and currently listed properties on MLS that are comparable. Those properties will compete against yours, when yours is listed. If comparable sales in the last year were $115,000, but there are five properties almost identical to yours, in the same neighborhood, listed on MLS for $100,000, then your value is some place south of $100,000. This might be because of a recent downsizing by a large local employer, controversy over tainted water, or recent violence in the neighborhood panicking homeowners into selling. So, get the data from the agent, and then evaluate it. I'm not saying this is the case with your agent, BUT it is a not uncommon practice for agents to over-value properties in order to get listings. Then, over time, the owner gets discouraged, reduces the price, and the property eventually sells for its real market value.

Gotcha, makes sense. Thanks again!

The games people play :)

" Buyer Beware". That will usually be the court's response. You can be mislead, lied to, deceived etc. etc. None of it matters. It is up to you as a buyer to protect yourself. Contract law is contract law. If you buy something its yours and all the obligations in the contact that you are responsible for regardless of your lose or woes. 

Maybe you thought buying real estate was always going to be easy. Truth is many things about buying real estate and real estate evaluation and appraisals is subjective. You cannot assume you will be ok if you will rehab. Maybe a rule of thumb would be to never buy a foreclosure near where there are or have been other foreclosures. Then if you do buy a foreclosure think about the after rehab value of your property being in line with similar propertied on the market and their price. This is why its always a good idea to build or improve in accordance with the market and never over improve. Seems counter intuitive if you think about it but that's how it is. 

If you really bother to read a good percentage of the posts here on Bigger Pockets you will realize that real estate investing can be a less than ideal business and that you should take your time to really evaluate carefully and fully any and every property you intend or consider to buy. 

@Gilbert Dominguez Thank you for your advice. We are new to rehabbing properties and making mistakes is how you learn. Lets hope its not an expensive one. However, do not think we are naive and thought this would be easy. I'll keep you updated on the outcome.

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