Assessed value and appraised value

Today I was corresponding with a customer about a condo he's planning to purchase.  We've looked at a few condos in this particular building and the unit in question has an assessed value that's lower than the others.  His thinking is that the property is worth less than the others because of the assessed value.

That's a common belief and sometimes it's true.  Other times it's definitely not true.  Assessed value and appraised value are determined by different parties for different purposes.

Assessed value is determined by the Real Property Tax assessor

County tax assessors determine a property's value based on its size, location, view, age and amenities, among other things.  In the case of this condo, the assessed value is probably lower than the others we looked at because it's on a lower floor.  Higher floors generally have better views and are worth more.

Variations in assessed values

A friend of mine is a property tax assessor for the City and County of Honolulu.  His knowledge has been very helpful to me over the years.  He says that a lot of condos may get a look on the outside from a tax assessor once.  That's it!  The island of Oahu alone has thousands of condos and townhome developments.  The tax office has a limited staff and they use comparables to develop assessed values.

Last year a customer purchased a condo that had a surprisingly low tax assessed value.  This particular building was originally apartments and years later was converted to condo.  The tax office obtained information about the average size of studios, one bedrooms and two bedrooms and came up with assessed values. 

The unit my customer was buying had a huge lanai (300 square feet).  However the tax assessed value was low and we learned that the tax records showed a much smaller lanai.  When we obtained more information about the building, we found that most of the comparable units in the building had 100 square foot lanais.  

In some respects this is a bargain.  The owner has a relatively low assessed value and pays lower taxes.  This can also be a problem... 

Sometimes appraisers do a "drive by."  Rather than actually entering a home and inspecting it, they drive by the house or building and use available records to determine an appraised value.  If they use the tax records and your property has an unusually low assessed value, the appraisal may be affected.

What to do if your appraisal is too low

• If your appraisal is significantly lower ($5,000 or more) than your planned loan amount, first read the appraisal carefully.  Look at the comparable properties listed in the appraisal report to determine whether they are truly comparable.  Sometimes they aren't!  Talk it over with your realtor and have him/her pull comps to see if the comparables used by the appraiser are fair.

• Ask the seller's agent if the appraiser entered the property.  Sometimes a realtor or owner waits around for the appraiser and he never knocks because he did a "drive by".  If you learn that the appraiser did a "drive by," request that he return and re-appraise the property.  Some appraisers will charge an additional fee for this.  That's why it's good to know your lender and for your lender to know the appraiser being used.

• Don't waste a lot of time and effort arguing with the appraiser.  Appraisers are under pressure to justify values while preventing real estate bubble-type speculation.  Arguing with the appraiser about the value of a home is probably not productive unless he or she clearly made a mistake (interior area, lot size, number of bedrooms, etc). 

• If your efforts do not get the appraiser's value up, you can try another appraiser!  In Hawaii, that will cost about $300 for a moderately sized condo or home.  The money comes out of the buyer's pocket, yes but it might very well be worth it.  After all, if you're spending $500,000 on a great home, $300 is not a big percentage of that amount.  Personally, as the buyer's realtor I would credit the amount to my customer at closing.

What to do about a low tax assessed value

Hmmm, do you really want to do something about it?  Yes it might be a problem for a buyer when you sell, on the other hand you get the benefit of lower property taxes. 

When the property is sold, the sale price will figure into future "comps" and adjust the overall price of a comparable property.  However if the tax records are incorrect (as in the example above) the assessed value may continue to be lower than it should be.  You can contact the Honolulu Real Property Tax Department (808) 527-5510 and explain the situation.

 Mike Bates is a realtor selling homes in Kaneohe and other Hawaii neighborhoods.

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