"This house is only worth $245,759 according to the tax appraisal. So why is the seller trying to get me to pay $266,000?"
This is not an uncommon question asked by clients as they go through the process of conducting their due diligence. If I can work with them early in their seach, I can reduce the concern about value, worth, and asking price-offer price. The determination of value or worth is not an exact science but we do have ways to evaluate.
Property Tax Value
The tax assessor knows the initial value of a new house based on the sales price. But from that day forward, they do not know the things the homeowner does to add or take away value in the home. Certain modifications that affect health and safety require building permits that could alert the tax department of changes, but the coordination between municipal departments is not always great.
The tax assessor uses the surrounding neighborhood more than a specific house to assign value.
At best, the property tax valuation is done on a drive-by basis. The tax department is charged with obtaining enough revenue to operate the government entities for which it operates on a fair basis among its tax-paying citizens. The taxable value is not, in my opinion, a true measure of value for a buyer or seller.
Lender's Appraisal
I am not an appraiser. The following is based on my observations and evaluations of many years of buying and selling property.
The lender's appraisal is based on market value (what buyer's have paid for similar properties in the recent past), with a reduction for a worst case situation if the buyer defaults. The default would cost the lender additional money to reacquire the property and eventually resell. The lender's appraisal is usually the most conservative estimate of value. Different appraisers can come to different opinions regarding the value of the property being evaluated.
Here is a link to the Uniform Residential Appraisal Report.
Comparative Market Analysis (CMA)
CMA is a tool that gives the potential buyer an estimate of value for a property. It is based on real people committing real dollars for the purchase of similar property in the same general area. The real estate professional selects properties that have sold in the recent past similar to the property being considered for purchase. I use data from the past three months. (In years past, I used data from the past six month's data.)
Just as in the Lender's Appraisal, real estate professionals can come to different conclusions regarding the value of a property. Since we can determine the actual sales price for the homes sold, we can make adjustments by adding or subtracting for the known differences between the desired property and the properties actually sold. As a check, we can also take into account properties that were on the market but did not sell. This is an outer marker that shows the market rejection of properties priced above that which buyers were not willing to buy.
The judgment of the real estate professional in making the price adjustments to arrive at an offer price or offer range is the most important part of this process.
Conclusion
Part of buying a home is a logical and rational process. The economic analysis falls into this area. Part of buying a home is emotional. It's great to have balance and balance is not the same for everyone. What it really comes to when making a decision on value or worth is, do you have a comfort level that this is a house you like enough to pay your offering price? If the answer is yes, make an offer. If the answer is no, keep looking until you can answer, yes.
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