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  • Writer's pictureE. James O'Malley - Certified General Appraiser

Why The Values Diverge: Demystifying the Difference Between Appraised Value and Assessed Value

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Have you ever found yourself scratching your head over a perplexing property puzzle? It's a scenario that plays out more often than you might think in the world of real estate. Picture this: you've just had your property appraised for a refinance, and the appraised value comes in much lower or higher than the county's assessed value! How could the appraisal be so different from the assessed value if they are both estimating the property's market value?

This reaction is understandable given the perception that appraisals and assessments should reflect similar property valuations. However, the appraisal provides a detailed inspection and analysis based on current market conditions, while the assessment relies on mass valuation techniques that may not capture recent market swings. Understanding these key methodological differences between appraisals and assessments can set better expectations.

For residential and commercial property owners, this distinction between a property's appraised value and assessed value is key. While they may sound similar, they serve different purposes and are reached through different appraisal methodologies. What accounts for this difference?

What is Appraised Value?

When real estate transactions occur, whether a home purchase, refinance, estate planning, or commercial sale, an appraisal is completed to determine the property's market value as of a specific time. A qualified, licensed, or certified appraiser considers factors like:

- Recent sales prices of comparable properties

- Location

- Square footage and land size

- Number of units, bedrooms/bathrooms

- Building condition

- Upgrades and improvements

- Income approach for commercial properties

The appraiser analyzes this objective data to provide an appraised value for the property per real estate market conditions as of the effective date of value, which is most often the current market. These appraisals are most often used by lenders to confirm adequate collateral for loans. However, other appraisals, such as retrospective, forensic, or date of death appraisals are often used by estate planning attorneys and accountants. These appraisals often require appraisers to develop a retrospective opinion of value.

To become a licensed or certified appraiser, stringent educational, experience, and testing requirements must be met. In the United States, appraiser licenses are issued at the state level by regulatory bodies such as the Bureau of Real Estate Appraisers in California. Appraisers must complete coursework approved by the Appraiser Qualifications Board, obtain requisite appraisal experience hours (which can be in the thousands), and pass national examinations through The Appraisal Foundation. It's quite of bit of work for one to become a certified appraiser.

What is Assessed Value?

A property's assessed value is determined annually by the county assessor's office for property tax purposes. However, assessments can also be triggered by such things as changes in ownership (e.g., sale, transfer, or inheritance), substantial remodeling or construction, changes in use (commercial to residential), and new construction. Assessors estimate market value to calculate taxes, but typically do not perform detailed inspections. Though in the case of remodeling or construction, a city or county building inspector may perform an inspection. Assessed values may utilize:

- Location

- Square footage

- Number of rooms

- Construction costs

- Depreciation

Since assessments aim to efficiently appraise many properties, they may not reflect swings in property values or consider other variables that influence market value.

How Appraised Value Differs from Assessed Value

When purchasing real estate or obtaining financing, property owners deal with both appraised value from a private appraiser and assessed value from the county assessor. While they may sound similar, there are important distinctions between these two valuations.

Private Appraiser Qualifications

Licensed and certified appraisers must meet stringent educational, experience, and examination requirements mandated by state and national regulatory bodies. Appraisers complete coursework approved by the Appraiser Qualifications Board, obtain extensive appraisal field experience, and pass national exams through The Appraisal Foundation.

In contrast, county assessors and their staff are not required to hold the same certifications. Many do not have the same level of formal real estate appraisal education or hands-on experience as private appraisers. Requirements vary significantly by state and county. San Mateo County Assessors for example, are not required to be licensed or certified, nor are they required to obtain the same amount of experience hours as a private appraiser.

Appraisal Methodology

When appraising a property, private appraisers perform a thorough inspection and analysis. They carefully evaluate comparable sales, location, square footage, construction quality, renovations, and other indicators of market value. For commercial properties, appraisers also utilize income capitalization and other advanced approaches.

The appraiser synthesizes all data gathered into a detailed narrative appraisal report supporting their final value conclusion. This rigorous methodology aims to establish true market value at the time of appraisal.

County assessors utilize mass appraisal techniques to efficiently assess large numbers of properties. With limited staff and high volumes, assessments apply formulas and modeling rather than physical inspections. Assessed values may not reflect spikes or dips in the market.

For example, one critical aspect that contributes to the disparities between assessed value and appraised value, particularly in the case of commercial income properties, is the method used by assessors.

The substantial disparities in the opinion of value between property tax assessments conducted by county assessors and professional appraisals are a frequent source of confusion for property owners, especially in the realm of commercial income properties. These differences can be attributed to distinct methodologies and objectives employed by these entities.

County assessors typically approach their assessments by considering properties in fee simple, essentially treating them as if they were unencumbered by leases or tenant agreements. This approach often adheres to specific Revenue and Taxation codes and prioritizes the use of market rent data and general property characteristics like location and size to determine assessed values. As a result, they may not fully account for the actual income generated by existing leases, lease terms, or lease structures. The primary goal of county assessors is to uniformly assess properties within their jurisdiction for tax purposes, ensuring a fair distribution of property tax burdens, which may not always align with the true market value of individual properties.

In contrast, professional appraisers take a more comprehensive approach when assessing commercial income properties. They often rely on the income approach, which involves a detailed analysis of the property's income stream, including factors such as existing leases, lease terms, lease structures, and tenant quality. Their objective is to provide an independent and unbiased opinion of the property's market value, taking into account not only its physical characteristics but also its income-generating potential. This approach allows appraisers to assess the property's ability to capture market rent at the time of sale, which is a more accurate reflection of its true value in the open market.

Additionally, when a property has experienced below-market rent for an extended period, professional appraisers consider this factor and its impact on the property's overall value. County assessors, focusing on fee simple assessments, may not adequately account for the income disparities caused by below-market rent, potentially resulting in a vastly different valuation of the property for property tax purposes.

In essence, the significant differences in value opinions stem from the contrasting methodologies and objectives of county assessors, who prioritize tax uniformity, and appraisers, who aim for precision and objectivity in assessing commercial income properties. Property owners should be aware of these disparities to ensure they receive fair and accurate property valuations, particularly when considering factors like below-market rent that can significantly affect a property's true market value.

Empirical studies have emphasized the significance of location, method, and the timing of valuations in the disparities between assessed and appraised values. For example, a study by Anderson and Wassmer (2023) found that the assessed values of residential properties in upstate New York were lower than the appraised values by an average of 35% from 2003 to 2012. Another study by Dinterman and Katchova (2016) compared the sale prices and appraised values of farmland in Ohio from 1994 to 2004 and found that the appraised values were lower than the sale prices by an average of 28%. A recent working paper by Matsa, Shapiro, and Wolfers (2020) used a large dataset of property records to examine how the assessed values and appraised values of homes vary across different neighborhoods. It found that assessed values were lower than appraised values for 58% of all properties in the United States.

Understanding Appraisals and Assessments

While county assessed values provide a baseline for taxation, private appraisals offer a detailed property valuation based on expertise and market analysis. Recognizing these key differences helps owners make informed financial choices regarding their real estate.

Ready to gain a comprehensive appraisal of your property's market value or need assistance with any real estate valuation matters? Our team at Detailed Analysis is here to help!

Contact us today to schedule a personalized consultation with one of our experienced and certified appraisers. Whether you're a homeowner, investor, or beneficiary, we'll provide you with the professional insight you need to make informed decisions about your real estate.

Don't let the differences between appraised value and assessed value leave you in the dark. Trust Detailed Analysis for accurate, thorough, and reliable real estate appraisals that promote confidence and trust.

[1] John H. Anderson and Robert W. Wassmer, “The Accuracy of Assessed Values in Upstate New York,” Journal of Property Tax Assessment & Administration 18, no. 1 (2023): 5-24.

[2] Robert Dinterman and Ani L. Katchova, “A Comparison of Farmland Values Using Hedonic and AVM Models,” Journal of ASFMRA (2016): 68-86.

[3] David A. Matsa, Jesse M. Shapiro, and Justin Wolfers, “Assessing Inequality in the Valuation of Residential Real Estate,” NBER Working Paper No. 27941 (2020)

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