I'm constantly amazed at how opaque the real estate industry is to the average consumer. I don't at all mean that as a knock on the consumer, or any indication that consumers aren't smart. And trust me, I think we as real estate professionals are responsible for the general public's lack of understanding of what we do. WE agents are responsible for the stereotypical image of us - mere pushy "salespeople" (said as a dirty word), not experts and partners in a very complicated and complex financial transaction. Realtors, and other parties to a sale of home, don't do a good job explaining exactly what it is we do, and why we are value-added to a transaction, especially in difficult financial times, such as these.
So, I think I'm going to try to do my part in my own tiny little part of the cyber-universe, and try to edu-mu-cate folks, by deconstructing some of the confusing terminology that seems to trip people up. I'm going to start at the beginning of the alphabet, with the confusing "Three As," the appraisal, the assessment, and the abatement.
Appraisal: An appraisal is an evaluation of a home's market value. It is prepared by an appraiser, who in Virginia is required to be licensed, and must follow specific standards in determining market value. An appraisal is usually ordered by the lender, to make sure the property that the lender is financing with a home mortgage is actually worth as much as the buyer is proposing to pay. The appraiser collects comparables, which are similar homes (by location, square footage, number of bedrooms and baths, etc.) sold within the recent past, typically within the previous six months. Adjustments are made for quality and condition, but are typically based on objective, quantifiable standards, such as more or less square footage, garage or no garage, basement or no basement, etc. Appraisals are always RETROSPECTIVE, looking backward at what the market conditions were in the past for similar sales. As a buyer, you want your appraisal to be HIGH. That means per the appraiser, the property you are purchasing is worth more than you are paying.
Assessments: I've blogged in the past about assessments, and how to challenge one. An assessment is the local taxing authority's valuation of your property for real estate tax purposes. In other words, you pay real estate taxes to the City or County based on the assessed value of your home. For example, in the City of Richmond, the tax rate is $1.23 in real estate taxes for each $100 of your home's assessed value. So, if your home is assessed at $100,000, you will owe $1,230 in real estate taxes for that tax year.
Assessments are generally fixed at the market price of a sale, and then adjusted over time by some statistical methodology. For example, when you purchase your home, the assessed value of the home may increase in that next tax year, Year 1, to the purchase price you paid. This is because assessors assume the purchase price of a property reflects the " fair market value" ("FMV") of that property, what a willing buyer would pay a willing seller in an arm's length transaction. After that time, in tax Years 2, 3, etc., the assessed value of your home stays the same or increases, typically based on some statistical amount, using recent sales trends in the immediate area of your property. The taxing authority will have an Office of Assessor, and that office is responsible for creating and administering the methodology to qssess that locality's property values. There is an appeals process if you believe your home has been incorrectly assessed, and the increase in assessed value is too high. As an owner, you want the tax assessed value of your home to be LOW, to minimize your real estate tax bill.
Abatements: Abatements are programs that your locality may or may not have, which "abate" or limit the real estate taxes you pay on your property in return for certain behavior the local government is trying to encourage. For example, the City of Richmond has a tax abatement program that suspends real estate tax liability on the increase in value an owner adds to a property, so long as the property value is increased at least 20% over the "base value assessment." In order to encourage individuals to invest in properties and ultimately add to the City tax base, the City will "abate" the real estate taxes for that added value for 7 years, and then will add back that abated amount 1/3, 1/3, 1/3 in Years 8-10.
I know that may sound like Greek, so let's use an example to try to clear up any confusion. Let's say I buy an existing property in Church Hill that has not been well cared for and could benefit from renovation. I file a piece of paper with the Office of the Assessor, and that office sends an assessor out to evaluate the property. That assessor fixes the value of the property in it's current condition at $100,000. Let's say I renovate the home and add a new roof, update the kitchen and bathrooms, refinish the original hardwood floors, add landscaping and paint the exterior. When my renovation is complete, I file another form with the Office of the Assessor, which once again sends an assessor to the property to decide what the post-renovation value of the home is. Let's say that now the house is worth $200,000, per the assessor. Well, for Years 1-7 following the process, you do not pay real estate taxes on that $100,000 of added value, which saves you the home owner $1,230 per year. In Year 8, 1/3 of the $100,000 in abated value, or $33,333, is added to the current taxable value of the property. In Year 9, another $33,333 is added, and in Year 10, the final $33,334 is added back to the taxable value, and the abatement ends.
So you see that an abatement program can save a property owner significant money over time. Another major positive of the program: The abatement runs with the PROPERTY, not the individual(s) who did the renovation. So, if you have a home with an abatement, and you decide to sell it in Year 5, the remaining 5 years of tax savings will transfer to the new owner. When marketing your property, that should give you as a seller an advantage over other similarly priced homes, all other things being equal.
Whew! I hope the above was at least somewhat helpful, and not cryptic and boring. If you have any questions, send them my way. I am also always open to suggestions on potential topics that you, the reader, might find interesting and/or helpful. Of course, I remain shocked that anyone actually READS anything I have to say. Oh, not you, Mom. [;)]
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