What does the Assessed Value really mean?

Question

Hey guys,

Im not too familiar with auctions but I've been searching for some properties that are listed to go on auction in my area.

The listings contain the overall price of the house and then it has an assessed value.

Could someone explain what that really is and what it means to an investor that would like to repair and hold as a rental property or flip?

Charlie MacPherson · Answer

@John Spina jr  I expect that this will vary by market.  Here in MA, we are THEORETICALLY at 100% valuation.  At least that's what the law says.

That means that the town's assessor uses the actual market value of a home for taxation purposes.

In practice, the difference between market value and assessed value can be all over the map.  For example, I pulled a property at random from my town.

9 Massasoit Ave, Plymouth MA is listed at $679,900.  The assessed value on the property is $216,300.

Those numbers will often adjust to the sale price or thereabouts when the property is sold.  In fact, my home purchased in Feb 2017 is assessed at $10,000 more than I paid for it.

So a proper answer to your question requires an understanding of how assessed values are determined in whatever market you're buying in.

I hope that helps!

Tom Gimer · Answer

@John Spina jr The assessed value has nothing to do with the hammer price in an auction.

And, depending on how often properties are re-assessed by the taxing authority, the current assessed value may not even be what the auction purchaser's property taxes woulld be based on.

Ron S. · Answer

I'm not trying to be crass or anything like that here but if you are asking that question, you aren't ready to bid at auction just yet (Yeah, I get your disclosure that you are new at it). Assessed value has nothing to do with anything whatsoever as it relates to auctions. Just like, Kelly Blue Book values on your vehicle have nothing to do with anything whatsoever on the price of getting your oil changed. As Wayne and others have pointed out, assessed value is for tax purposes and in some cases, insurance purposes but, have nothing to do with auctions.

The assessed value may have something to do with your investment strategy but one size does not fit all. A ranch in Arkansas with 500 acres and a triple wide sitting in the middle of it will be taxed (assessed) much differently than a 800 square foot bungalow on 4,000 square foot lot, overlooking the Malibu bluffs of the California coast.

William Hochstedler · Answer

@Jesse Leon Storey

The only difference in how much you spend on a property at auction and any other property is the contingency for risk.  Because you can rarely do proper due diligence on properties, you need to factor in a contingency for unanticipated problems.  This is why buying at auction is not a newbie sport.  Without extensive experience, your familiarity with the things that could go wrong with a certain property can't compete with the operators who are doing this all the time.

Your analysis for any type of purchase should be determining the following:

• What is the highest and best use? (Or what level of finish, improvement, or modification do I need to make to maximize a property's value or performance?)
• What is the market value of the improved property?  For 1-4 unit properties, this is done through comparative analysis.  This number is often called "After Repair Value" or ARV.
• How much will it cost to "repair" or modify the property to get it to the condition determined in #1
• How much profit do I need to make on this type of project considering the risk?

A typical formula to express these steps is (1-Profit%) x ARV = Purchase price + Cost of Repairs.

In other words, if I am flipping or a fix-and-hold investor and need to make a 30% equity position for a deal to work for me, I would need my finished all-in cost to be 70% of market value after improvements.  So I just take that number and subtract the cost of repairs or other modifications, and that is my acquisition cost.

As an example, similar houses in rehabbed condition in the same neighborhood are selling for $250K.  I would need to own this property for $175K to meet my criteria.  I can tell from a drive-by that it's going to need $45K in work to get it to a condition similar to the comparable properties.  Therefore, I can spend up to $130K to buy this property.  To put numbers into the formula it would look like 70% x $250K = $130K + $45K.

Hope that helps.

William Hochstedler · Answer

@John Spina jr

You can go down to your assessor's office and they will tell you how they come up with these numbers.  Understand that assessors are not appraisers and their mission is not to find true market value.  Their mission is to assess properties for the highest possible amount to generate the maximum revenue without getting push back from property owners (either politically or through appeals).  Think of it like a sports book in Vegas.  The bookies are not trying to pick winners, they're trying to split the market.

On top of that, unlike appraisers, they need to assess thousands of parcels annually and therefore generate algorithms to do this as efficiently as possible.

So assessed values may be wildly inaccurate for the following reasons:

• Poor algorithms / methods
• Statute (or lack of resources) requiring infrequent reassessments in a changing market
• Anomalous properties that have features that can't be adjusted in a wholesale fashion

The assessed value can be a great tool if you understand how your county is arriving at that value.  It shouldn't be used instead of fair market value (because that's not what it is).  But it can be very helpful as a baseline to quickly look at a lot of properties to find the deals.

For example, you could scan hundreds if not thousands of properties and only focus on the ones that compare most favorably against the assessed value.  In this way, the number can be pretty meaningful.

But once you isolate the best prospects, do your own analysis to come up with a better market value.

Karen O. · Answer

Final price at auction, depends on the type of auction (tax lien auction, bank auction, bankruptcy auction, etc) and the amount someone is willing to pay to own/control the property.

Jesse S. · Answer

@William Hochstedler great answer!

That is a good overview of how to start. Thank you.

Bob Prisco · Answer

@John Spina jr  not really much LOL.. It really does not provide an accurate value as the property could not have changed hands is years,therefore no new sales price, improvements could have been made, values in the area have changed etc.  I have seen  props that have assessed values of 50k that will appraise for 90k. Just run comps, its easy nowadays, heck  even Zillow provides closed sales,

Good Luck

Ron S. · Answer

Your comparative analysis should suffice. The "Auctioning off" should not have a material impact on value so while YOUR house may be an auction, and the houses you compare it to may not be an auction, in the spirit of Hillary Clinton, "What difference does it make"?! There is no REO stigma of any material amount these days.

What does the Assessed Value really mean?

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