How Do Home Assessments Relate To Home Prices?

How Home Assessments are Calculated

Assessed values are mostly calculated by computers that have access to basic information about a home, including approximate land value, size, age, and occasionally an updated notation on condition. Assessors are in a house only rarely though, and generally the market moves in various directions for various houses and so the correlation with market value can be off by quite a bit (10-20% is not uncommon, but more than 20% is rarer.) The towns' goal is not to determine market value, just taxable value, so in normal markets (small rates of increases) the values will typically be below asking prices. Homes that have recently been updated may far exceed assessed value, especially if such updating did not require a permit (and thus, the town is unaware that such updating has happened). Many towns will have the assessor re-visit after a major renovation, to make sure the property is correctly assessed. Lastly, note that assessed values, due to the tax cycle, can be 6-18 months behind the market in direction, which is a fancy way of saying they really reflect valuations in the past, more than current factors. When the market moves slowly, this is generally not an issue, but when it moves quickly in either direction, you'll see some strange discrepancies.

How Home Values are Calculated by Industry Professionals

There are methodologies for calculating home
prices in the abstract, but there's no uniform
approach.
Home values are calculated by industry professionals as close to real time as possible. By looking at actual sales that have happened recently, pros try to establish current MARKET value, not approximate TAXABLE value. There are many different ways to do this, but most analysis techniques focus on similar home styles and similar locations. The goal is to find out what the real-time valuation is. Many non-professionals focus on single metrics - like $/sq foot. But across different house styles, the ranges in any one metric are large enough to not be useful. For example, you'll find that antique properties will vary widely on a $/Sq foot basis, but even similar homes that have very different locations will also vary substantially. In addition, at some point, condition begins to play a major factor. A 1960's home, tastefully renovated, is going to get substantially more than one that hasn't. Often part of the job is understanding which updates most buyers will pay for - and how much. The reverse is also true, there is a term called functional obsolescence, defined as parts of a home that no longer fit today's needs. A good example might be a home that doesn't have any garage - today, most buyers have cars, and lack of a garage will deter most buyers, resulting in a lower price. There are other issues as well.

How Can I Calcuate a Home's Value?

Well, the EASIEST way is to look at about 200 houses and figure out why they are selling and why they are not. Then you'll have an idea of what buyers will pay for - and what they expect to be compensated for. You need a good sense not just of what is important to you - but what is important to everyone one, or most everyone. It's easy, for example, to understand that a home that has significant highway noise will sell less than a similar home without highway noise. But how much less? 5%? 10%? 20%? It depends both on the home, the highway (how many lanes?, the noise (how much noise?), and many other factors. There simply is no solely math based approached that has proven reliable, otherwise, banks and appraisers would never make a mistake, which is clearly not the case - they make lots of them, despite rigorous mathematical approaches. Zillow has tried to solve this problem mathematically, but my own analysis has shown that Zillow "Zestimate" can be off by an AVERAGE of 14%, in either direction. To put that in perspective, on a $400,000, that's a difference of over $55,000. Not very accurate, and the reason is simple: Zillow can't "hear" a highway, it can't "see" a steep driveway, it doesn't know that the kitchen "has been updated", and it knows nothing about landscaping, paint, roofs, driveways, mudrooms, and many other things that buyers care about.


*All information is posted in good faith and is assumed to be reliable, but may rely on third party information sources.



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 Matt Heisler
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