[kenberg]

For reasons that are too boring too explain, I need some info about housing prices. Really I am hoping for accurate info from those in the know.


Situation:
An average couple buys an average house in an average neighborhood. They take a mortgage and the bank assesses the value of the property. Suppose SP is the selling price and AV is the assessed value. I suppose in an ideal world, SP=AV. I am asking about what actually happens in the real world. My guess is that when the housing market is going up, SP usually exceeds AV, and when, like now, the market is falling the SP is usually less than the AV.

Briefly, I am involved in helping some things get settled. People more or less trust me, and I want to be accurate and helpful. My thinking is that the current AV is a fair enough price to go by if, as is the case, there is an advantage to everyone in having the deal go through smoothly. It would be unreasonable in a falling market to expect the SP would be more than the AV. Less would be fine and perhaps would better reflect the actual market, but equal is ok as a matter of getting it done. Does this sound right?

There are reasons to hopefully avoid the usual approach of offer and counter offer, bluff and counter bluff.

[PassedOut]

Where I live the assessed value of each parcel is adjusted to be accurate every year, based on the actual market. You can appeal your valuation to the Board of Review. (Our property taxes are based on 50% of the assessed value, but the yearly increase is capped so taxes for long-time owners are lower than for short-timers.)

The law is not always followed, though, and we had to take action here to force the local government to comply. Quite a few assessments have dropped the last couple of years.

[y66]

kenberg, on 2011-January-08, 08:02, said:

My thinking is that the current AV is a fair enough price to go by if, as is the case, there is an advantage to everyone in having the deal go through smoothly. It would be unreasonable in a falling market to expect the SP would be more than the AV. Less would be fine and perhaps would better reflect the actual market, but equal is ok as a matter of getting it done. Does this sound right?

That sounds right to me.

Agree with passedout that AV can be out of whack depending on the jurisdiction. In my neighborhood, AV2009 is a decent, conservative estimate of average SP2009 and approximately 10 percent below current SP.

I am definitely not in the know. My gurus on housing prices are David Leonhardt and zillow.com. I'm pretty sure Leonhardt would agree with your statement, subject to passedout's caveat, and maybe add as further caveats that it's still possible (not likely, but possible) for prices to fall another 20 percent and that home buyers planning to stay put for 5+ years have less to worry about there.

IMO, a lot of the uncertainty about future SP relative to current AV is neighborhood specific (for example, closer in, walkable neighborhoods with good school systems and multiple commuting options have a lower probability of (future SP < current AV) than, say, exurbs).

One thing you can do as a check on the relationship between AV and SP for the neighborhood in question is look at the Zestimates. Example here.

[awm]

I'm pretty sure that in my area (Los Angeles) we have AV=SP at the time of purchase by definition.

However, after the time of purchase the AV generally goes up at a slow rate (I think at most 1% a year by law, but it is supposed to depend on the market) unless there's another sale or the property owner chooses to reassess (i.e. there's no automatic reassessment unless the property is sold or there is a substantial addition, or the owner requests it and pays for it). The upshot is that houses which haven't been on the market are often very substantially undervalued. For example, I know people who purchased houses in the 1970s for around $200K and haven't reassessed, whose houses currently have AV around 270K, but if they actually sold the selling price (based on similar houses in the same community) would be roughly ten times that amount. This obviously creates some serious inequities with regard to property tax!

[Phil]

Ken I think you have some of your terms mixed up. The bank doesn't determine what AVs (AV = assessed value) are; the tax assessor does. The bank hires an appraiser for the purposes of determining what they will loan. If this discussion is about 'appraised values' instead of 'assessed values', ignore what I have written below.

The frequency of assessments is dependent on the state where the property is. Some states (through counties) reassess frequently; others do not. From what I can remember, most states reassess about every five years, but not all have a fixed schedule. The assessor takes an area and looks at it, sends out proposed AVs. With the decline in values, there hasn't been a lot of upward movement.

California's increases are fixed at 2% maximum per year because of Prop 13. The AV automatically resets on sale although certain types of transfers are exempt.

I have never heard of an area where the AV regularly exceeds the SP. If there is, I'm going to start a property tax appeals service there.

[kenberg]

You are correct that I used the wrong term. I meant appraised.

The problem is to determine fairly who gives what to whom. The obvious thing to use the appraised value that the bank produces as they consider the mortgage. Probably this in fact will be what happens. But as it happens their are many cooks in this stew and if someone tosses in a new ingredient I want to be prepared.

Anyway, I meant AV to be the value as determined by the bank through its appraiser. I seldom have need to think about these things and I misspoke.

[Phil]

Appraised value is defined as "what a willing buyer will pay a willing seller". Therefore as you indicate the SP should always approximate AV. AV is always in flux depending on many economic factors. There is lag, because in the real world, an appraisal is based on comparable sales which are a look backward. Prices fluctuate, and its hard to adjust for this lag based on prices that are trending up or down.

Can you give us more information? It sounds like this is a sensitive matter. If you want to talk about this over the phone, PM me and I will give you a number where I can be reached.

[kenberg]

Phil, I may take you up on your offer. The details are boring rather than shocking but you are right that there are some issues of privacy.

Y, the z-estimate is useful and seems to give credence to my general view. A recent house sold in that area for a price less than the z-estimate, but not a lot less. The z-estimate, as they say, is not an appraisal but it seems to be based on similar data (recent sales and such). It seemed likely to me that even though the sales are recent, the fact that they are still in the past would suggest the current market price in a falling market might be a bit down from the number they come up with. Similarly for appraisals. My sample size of 1 is modest evidence that this holds up.

It's a fluid situation, moving in the right direction, so the last thing I want to do is get too pushy with my views. But knowledge can sometimes be useful so I thank you all.

[Phil]

Ken, if you are going to to contact me, give me the heads up here please. I hardly ever check my PMs with the new interface.

[JoAnneM]

This is a really bad time to be using labels for negotiations. My son bought a foreclosure (4 year old home)this past year and everyone had agree on the purchase price (230,000), selling bank, purchaser. But, the new lending bank wanted an independent appraisal, and all signed papers to go with that new appraisal. My son ended up with a $25,000 reduction in price, which of course thrilled him. This now becomes the assessed value, where the previous assessed value was more than twice as much. And, he had been willing to pay the higher amount, so appraised values don't always mean much either because there are selling appraisals and buying appraisals.

[Phil]

Joanne, terms (or labels as you choose to call them) have never changed. The market has changed.

By the way, I would challenge a bank disposing of a foreclosure as a 'willing seller'.

[kenberg]

Phil, could you send an email to
kenbecky@gmail.com ?

I'll write up more details and send them off. It may be a couple of days or more because there are some floating subjects I want to pin down a little more.


JoAnne, the reduction in price for your son's purchase due to the bank's new appraisal is along the lines I am thinking. I hadn't heard of buyer and seller appraisals, but the one I have in mind is the appraisal by the bank that is contemplating, presumably issuing, the mortgage.
To some extent, we are willing to accept that we will pay more than might be the case if everyone went into full negotiator mode. The issue is where the line is to be drawn. There first was mention of a past appraisal of 325K which no one now can find. And a more distant past 375K appraisal. But there is an appraisal from last March (just skip the why there was one) for 316K. I expect that the bank's current appraisal will come in at a bit less than this. The 325 figure was psychologically unfortunate in that expectations arose that have to be revised downward, first to the 316 and then to the probable lower figure coming soon. My thinking is to explain that housing prices are dropping everywhere, that this is just a fact, and also that whatever the current appraisal is, that figure is likely to be higher than the current market value so that accepting the current appraisal as the price to evaluate equity is already a considerable concession and no more should be expected. If we get into bargaining, the bargaining will be downward toward current estimated market price, not upward toward a no longer realistic previous appraised price.

I now think this view is acceptable to all. At least I hope so. If so, the possibly somewhat above market figure won't bother me.

There are some other issues that are more complex than I would wish, and once I get my head around them I think I will ask Phil for his thoughts. I am pretty sure everyone is a straight arrow, or trying to be, but complexity upsets me. Basic motto: The simpler the arrangement, the less likely that you will regret it later.

[mike777]

kenberg, on 2011-January-08, 15:58, said:

You are correct that I used the wrong term. I meant appraised.

The problem is to determine fairly who gives what to whom. The obvious thing to use the appraised value that the bank produces as they consider the mortgage. Probably this in fact will be what happens. But as it happens their are many cooks in this stew and if someone tosses in a new ingredient I want to be prepared.

Anyway, I meant AV to be the value as determined by the bank through its appraiser. I seldom have need to think about these things and I misspoke.

I think you go wrong in terms of using the word fair or even worring about the word fair.

If you think a house is worth 200K but you are not putting up the money but I am putting up the money and think it is only worth 150K why get hung up on fair.

Keep in mind the more desperate the seller is the more fair value is much much lower.

Example look at all the stocks worth billions if not hundreds of billions and in a matter of months were sold for close to zero.

[TimG]

kenberg, on 2011-January-09, 16:10, said:

My thinking is to explain that housing prices are dropping everywhere, that this is just a fact, and also that whatever the current appraisal is, that figure is likely to be higher than the current market value so that accepting the current appraisal as the price to evaluate equity is already a considerable concession and no more should be expected. If we get into bargaining, the bargaining will be downward toward current estimated market price, not upward toward a no longer realistic previous appraised price.

Ken, a current appraised value should reflect current market value, an appraisal done ten months ago may not reflect current market value. There should be a section in the appraisal that evaluates the current market conditions, that is whether prices are generally going up or going down and if it is significant in one direction or the other adjustments would be made in the appraisal process. The idea behind an appraisal is to determine current market value taking into consideration all factors; you shouldn't have to factor in market conditions to a recently completed appraisal.

If the appraisal that you reference is ten months old, I would suggest paying the few hundred dollars a new appraisal would cost and using that value. I don't know the details, but it sure sounds like a current, independent valuation would be useful.

[TimG]

Phil, on 2011-January-08, 12:20, said:

I have never heard of an area where the AV regularly exceeds the SP. If there is, I'm going to start a property tax appeals service there.

Does that mean you'll be moving to Maine?

Assessments in Maine are done by municipalities, not the county or state. It is common for assessed value to be higher than market value or sales price. Of course, if a whole town is assessed at market value plus 10%, it makes no difference to the taxpayers.

[mike777]

I would never never rely on any assessment done by an outsider if spending my own money.

Now If I am spending your money, well that was a different issue.

However I would rely on my friends advice regarding all things mechanical.

[Phil]

TimG, on 2011-January-09, 20:53, said:

Does that mean you'll be moving to Maine?

Assessments in Maine are done by municipalities, not the county or state. It is common for assessed value to be higher than market value or sales price. Of course, if a whole town is assessed at market value plus 10%, it makes no difference to the taxpayers.

No, too cold Been there done that

Yes, I'm aware that other entities can set the AV, but I didn't want to confuse the issue. What basis do the municipalities have to set such high prices if they aren't market based?

Do property taxpayers in Maine have the right to appeal values? And why does it matter if the whole town is over-assessed?

[Rain]

I am getting confused due to the use of the terms "appraised" value and "assessed" value.

These 2 terms are more commonly used in different situations.
Assessed is by your local tax people, for the reason of property tax, and there may or may not be laws governing assessed values and how much they can fluctuate. CA one cannot increase by more than X% unless resold to non family or something like that. But in many other parts of USA it's usually reassessed every few years. But this is for tax purposes.

Appraised values are done by appraisers. You can purchase one any time, but usually they are hired by the mortgage giver as a condition of the mortgage, and the applicant usually pays for the appraisal. In an ideal world, technically the SP = AV. But in the murky world of real estate, the appraiser, eager to please the party that gives him repeat business, is likely to either over appraise or under appraise. In which case the AV will not reflect real price. In actual fact, many appraised values miraculously will be equal to agreed upon "selling price".

Finally, say you're the buyer. AV is less than the agreed upon purchase price. Your purchase price is not automatically decreased. You have to renegotiate that decrease. Mortgage company doesn't care where the decrease in price comes from - buyer can put more down to make up the difference.

[Rain]

Oh, we bought a townhouse a few months ago and went through all this.

The selling price was miraculously identical to appraised value, which is what the real estate forums I go to have said will happen.

When reading the report, you also don't get the idea that much thought had been put into the appraisal. It was hardly scientific. Only providing a few comps, and adding/subtracting for completed basement or unfinished basement. I was hoping that the appraisal would contain projected rental value, for instance. Or adjust for local economic conditions a little. And, most importantly, you'd think the appraiser should work "blind", and come up with his own independent idea of what the value of the property should be! $500 doesn't buy you much these days!

What I learnt from the whole process was, appraisals are not for the buyer. They are a tool wielded by the mortgage seller to entice you to buy + enable them to sell your mortgage and get it guaranteed. (likely to be overappraised) They can also be for protecting the bank if it's doing a home equity loan. (Under appraise). If you're helping the buyer, the home inspection is your tool for negotiation.

[kenberg]

This is for Tim, Rain posted while I was writing. I'll get to Rain tomorrow.

Tim, I got you off track a little here I think by originally saying "assessed" when I meant "appraised". The concern is not (at least not immediately) the taxes. The desire is to have a reasonable estimate of what the selling price would be, and to get this without putting the house up for sale to the public.


As anyone working their way through this thread can probably guess, the outline is that two people, A and B, now own a house together and will subsequently each own a separate house. There are more than the usual reasons, which I will not elaborate on, for one of them to keep the current house. Some money will change hands.

There is a possible market solution that goes like this: A offers to buy B out for x dollars, with the added feature that B can say "No, but I will buy you out for that price". Sort of like the old way to cut a cake fairly: One person cuts, the other person chooses. However, it turns out that A prefers to stay in the house, B prefers a different house. Both agree that this is the preferred solution. One can use more sophisticated fair distribution theory approaches to handle this wrinkle, but that is not necessarily best.

Hopefully it goes like this: Somehow they agree on the value of the house, they subtract the remaining mortgage, that difference is the equity, they divide that by 2, and that is the amount that A gives to B. So far, everyone agrees. But now the value of the house must be agreed to.

I believe that we are now pretty much in agreement that the house value will be taken to be the value of the appraisal that the bank does as preparation for a new mortgage. The bank has three appraisers that they use, and for each appraisal one appraiser is picked randomly. When I first posted, I was worried that this whole arrangement was coming undone due to the earlier higher appraisals so I was testing the claim that the bank's new appraisal is a reasonable basis by getting views from you all. I didn't want to propose this approach if people familiar with appraisals were then to say "No, that's crazy, everyone knows appraisals are way off". It does not have to be a perfect method, it has to be good enough so that all parties agree that they are willing to go forward on that basis. I think we are coming to that.

You all have helped. Thank you. As mentioned there are some complexities but I plan to take Phil up on his offer to consult with me as soon as I am prepared to describe my understanding of these complexities.

Btw: A and B are not me and Becky, we are fine.