Appraisal vs. Assessment
As a real estate professional, homeowner or home buyer, it’s important to understand the difference between the ‘Tax Value’ (usually referred to as ‘Tax Assessed Value or Assessed Value’) and the ‘Appraised Value’ when trying to determine the Fair Market Value of a property.
Many clients look at the Assessed Value (which is often publicly available online on your municipality’s website) and assume that the number provided represents the current market value. While there are a few instances where the Assessment might equal the current value, it is important to understand that this would only be a coincidence as both values are unique and are done for different purposes at different times.
An appraisal is done to determine the current market value of a specific property on a specific date. The appraisal is usually done to satisfy a lender or a buyer. For a typical residential appraisal, the appraiser will be tasked with providing a valuation that represents the ‘fair’ sales price of the home if it were bought or sold today. The definition of market value is what a reasonable buyer would pay in balance with other choices, and where they are neither highly motivated or casually motivated. In other words, it assumes a hypothetical and perfect market, which exits only in limited circumstances.
To complete an appraisal, the appraiser must prepare two approaches to value, and in a residential appraisal, this will include a direct comparison and cost approaches. They will typically rely most heavily on a direct comparison approach to value. This process utilizes current market data including recent (usually within 3 months or less) sales on properties that are similar in style, size and location to the subject property. An appraiser uses these properties to compare them to the subject property. These properties are referred to as “comparables” or “comps”. Once the most appropriate comps are identified, the appraiser will adjust for differences such as: square footage, number of bedrooms and baths, updates, time of sale and location. Once these adjustments are made, the appraiser will use the information to arrive at the direct comparison value which will then be reconciled with the cost approach, to arrive at the final value for the home being appraised.
The property tax assessment is a value placed on a property for municipal and provincial taxation purposes. The reason for the exercise is to ensure that each property owner pays their fair share of their property taxes relative to other property owners, based on their relative property values. In Alberta, the current property assessment notice indicates the respective municipality’s estimate of your property’s market value (the amount it would have sold for in the open market) on July 1 of the previous year. It is also adjusted for any changes in physical condition as of December 31 of the previous year. Provincial legislation establishes these dates and requires that property assessed values be estimated every year.
Municipalities assess each property annually to distribute fair and equitable taxation. The estimated value of each property comes from the measurement, analysis and interpretation of the real estate market and is governed by the Municipal Government Act. This process is based on mass appraisal models that are an expression of how supply and demand factors interact in the real estate market. Most residential properties within Alberta are assessed using the sales comparison approach to value which is similar to an appraiser’s direct comparison approach to value.
Assessors use similar criteria that property appraisers use when estimating the value for a residential property. For example: style of home (bungalow, two-story or bi-level), size of lot, size of home, year built, basement or lower level finish, garage (size, detached or attached), building condition, fireplaces, air conditioning or other special features, neighbourhood, locational factors (proximity to amenities lakes, parks, river valley, commercial development and high traffic routes). Some information resources used by the assessors include: property sales data, Alberta Land Title office records and City records for permit and construction information.
Municipalities assess the value of your property to calculate the amount of provincial education and municipal property taxes you pay proportionate to the value of the real estate you own. Therefore, what you pay is based on your home’s assessed value. For example, if the tax rate for a municipality is $13 per $1,000 and the assessed value of your home is $500,000, the tax for that year on the property would be $6,500 (($500,000 / $1000) X $13). The Tax Assessment is required to be performed at regular intervals one year apart in order to fairly levy annual taxes against real estate located in its jurisdiction. Its purpose is to provide a basis for collecting the taxes necessary to meet the annual budget, not to provide an eventual buyer with the price that they should pay for the property.
In Alberta, Assessors are not required to hold any specific professional designation. Assessors have likely not seen the interior of each property they have assessed and in some instances the exterior hasn’t been reviewed recently. As a result, it is impossible for an assessor to accurately consider recent property improvements or the property’s current condition, including deferred maintenance or need for important repairs. Again, much of their information is taken from public record and may not necessarily be current or accurate for estimating current market value.
In Alberta, tax assessments are always between 6 months to a year and a half old since the effective date of the assessment is July, and only published in January or February of the following year. In other words, if you review a tax assessment in December 2017, the market value will be as of July 2016. As we know, the only consistency with regards to Alberta real estate values is its always changing. The lag time is one reason why the assessed values of a home are often different than a current appraised value. Another reason is that a property may be updated/renovated, in need of renovations or has another issue not considered by the municipal assessor.
Home owners are likely to better remember the highest tax assessment of their property than the most recent number. In estimating the market value of the property, it is useful to first take the tax assessment into account, then adjust for what you know has occurred in that local real estate market since the assessment date in July of the previous year.
As mortgage professionals, market values have significant implications for our clients. If a house appraises for lower than the estimated value, the lender may lower the amount of the loan. For a purchase, the buyer may not be able to or willing to increase the down payment to make up the difference which may result in a renegotiation, or, worse, the deal could fall apart. For a refinance, the lender may lend less than the borrower needs or not at all.
Like everything in real estate, education is key. As a real estate professional, it is important to educate your clients. Understanding the difference between assessed value and appraised value is yet another tool for your kit.