Real estate agents are able to employ a variety of methodologies when helping sellers to determine a starting list price when selling their homes. We don’t prepare every possible analysis on every single home and most of us have a comfort level with a particular analysis. Some of the common ways agents and sellers try to figure out what price a house should initially list for include:
- Comparative market analysis (CMA)
- Square footage analysis
- An actual home appraisal (as if for a home sale)
- Tax assessment analysis
In addition to a Comparative Market Analysis (CMA) which most agents use to help correctly price homes, I place a lot of value on a tax assessment analysis.
I first learned how to prepare this fantastic analysis from the person who encouraged me to get into real estate in the first place. This was back before technology took hold of the real estate world so my work was hand written on a piece of paper and my “Excel” grids were drawn with a pencil and ruler. When putting together this analysis today, I use a spreadsheet but when there’s only a handful of homes I’ll occasionally get nostalgic and use a pencil, ruler, calculator and a sheet of paper.
… but the assessed value of has nothing to do with the real value of a home, does it?
That is true… while the tax assessments have nothing to do with the value of a home, tax assessments are relative to the home, like the square footage is. The tax assessment is simply the value placed on a home for tax purposes. The assessment is updated yearly and the homes annual taxes are based on that number. The goal of the assessment is to annually try to correct the assessed value to be a certain percentage of what the home should sell for in a given neighborhood or area but those assessments are always lagging behind the current market so they vary from area to area. If someone gets a permit and improves the property, the new assessment reflects the improvement. It’s also interesting to note that with a “regular” CMA, you have to use similar homes (the “comparative” part of CMA) but with a tax assessment analysis, you can use dissimilar townhomes or single family homes. An assessment on a rambler will be lower than one on a colonial, as will the sales prices but the average ratios will be similar. One can think of it as being like a square footage analysis where the cost per square foot will be the same in two different sized homes.
In a given neighborhood, I compare the tax assessment to the list price and sales price to find out the difference as a percentage. Once I have the average, low and high ratios, I can apply those ratios to the subject property’s assessment to find out with a fair degree of accuracy, what it should list and sell for. It’s also gives me confidence about how likely a home is to appraise.
I look at the data in a variety of ways. I usually compare:
- List price to the assessment
- Sales price to the assessment
- The lowest and highest ratios to develop a range
- The sales price ratio after seller concessions
- The percentages over a timeline to see if ratios are rising or falling
- The Market Absorption Rate
The tax assessment analysis has always been one of my favorite tools as a real estate agent and I use it to back up regular sales data.
This approach has its skeptics and there are many experienced real estate agents that have a hard time understanding the value of this type of analysis. I’ve heard them say things like: “the assessment is wrong because it doesn’t have a deck” or “an assessment is always 7% (or whatever %) under/over value”. They don’t take into account the law of averages. Some are assessed high and some low. If you throw out some of the extreme highs and lows, the averages usually work out the same.