Market Value vs Tax Value
I often have buyers and sellers who want to establish value of a home based on the county tax appraisal number. I call it a number because I believe the amount listed on the county tax appraisal is rarely an accurate indicator of market value. I've had buyers come to me thinking they are getting a great deal because the property that interests them is priced below the "tax value". This is often never further from the truth. I also see some homeowners want to price their home at the "tax value". Both are very faulty in their assumptions. Tax values are just that....the value the tax authority has placed on the house as a determiner of how the taxes will be calculated. In my opinion it often is not related in almost any way as to the market value of a home. Market values can be and often are significantly different than tax values. They can be much more than tax value or much less....I have personally seen the tax value as much as 40% less and as much as 20% over the market value.
Reasons Why Tax Values are NOT Accurate
1. The numbers are normally calculated by a computer with faulty data. Interestingly enough the tax appraisers will not release information about how their valuations work. I am sure they have spent a lot of time trying to develop the best algorithms that support their ideas of accurate evaluations, the problem is, even if they have a great model, if the input is faulty, the outcome is faulty. Techies will often remember the quote from when the IT department was called data processing ... "garbage in = garbage out". The algorithms likely use a combination of data including lot size, home size, reported sales prices, values of neighboring properties, and perhaps reported increases in value by other government entities. So just take one data point.... home size... and see how that could affect value up or down. Where did the tax authority get the size of your home? Have you ever seen them come out and measure it? Have you ever let them inside to measure? Chances are they got it from the housing permit application that the original builder submitted to the code compliance department at the time of construction. I regularly see actual size very different than the size listed in the county appraisal records. One common reason for this is the addition of a game room over the garage between the time the plans were submitted and the time the construction was finished. A 20x20 game room could add 400sqft to the size of the home. In a neighborhood priced at $100/sqft that could mean an additional value of $40,000 to market value that is unreported to the county. Check your "bank appraisal" calculation of size versus the size reported to the county. Are they different? How much value does the difference make?
2. Homeowners only fight appraised values when they consider them too high? I have never heard anyone say they think their appraisal came in too low and fight to have it increased, so that they can pay more taxes. They tend to fight when they think it is too high and they understand that is the value used to calculate their property taxes. I have been to the hearings and it is interesting to hear what people will use to describe their homes and why the tax appraiser is wrong in their value assumptions. On average this tends to make tax appraisal values less than market values. I've seen the values of homeowners who fight as much as 20% below the neighbors with the same size, age, and homebuilder. My favorite example is a friend in Valley Ranch in Irving. He fought the appraisal value ever year he lived in the house for about 15 years. When we sold the house in 2007 the tax value was in the $140,000s, the neighbors were generally in the 170s and the sales price... in the 180s. The price in the $180s was MARKET VALUE. The home sold the first week it was on the market. This example shows that you can benefit from fighting the value each year. Think about it. This owner was paying perhaps as much as $1500 less in taxes each year as his neighbor who did not fight.
3. Central Appraisal District authorities often say they won't use foreclosure data when determining the tax values of neighborhood. WHAT???? No one believes this theory for a second. Ask a bank appraiser if they throw out all the foreclosure sales when determining their market value analysis. They don't. Of course they affect value, just like any other sale. Some neighborhoods currently have nearly every home sale as a foreclosure or short sale. If that is what is selling, that is the market. It is like they would like to use "suggested retail price" as the market price. They are often two very different prices on nearly all merchandise. Why should home values be any different. In this case TAX values are likely high compared to market value.
4. The home may have different construction methods, different upgrades than homes in the same neighborhood. This can also mean very different market values while the tax values remain similar. Do roofs with asphalt shingles cost the same as wood shake roofs, tile roofs, or lifetime metal roofs? Even on a simple house, the cost or value of the roof could be significantly different, but these are not always accounted for by the the taxing authorities. I find this especially evident in older neighborhoods where there are homes in original condition, homes that have been partially renovated and homes that have been completely renovated. We often see in this neighborhoods huge discrepancies between market value and tax value.
5. Lot values.... think about the neighborhood where you live now. Are some lots more desirable than others. Would you pay more for a water view? Would you pay less for the corner lot on the busy intersection in a residential neighborhood? There are different values for lots, however I most commonly see lots of the same size given the same values by the tax appraisal districts. This is just one more reason why tax values are inaccurate.
6. Ever heard of the agricultural exemption? I won't go into a lengthy explanation here, but land used for agricultural purposes is often taxed at a much lower rate than residential or commercial rates. That's why you'll often see a small herd of cattle grazing on a corporate campus in places like Westlake and Southlake.
7. Tax values are set once a year with data that is often months old and are supposed to reflect the value of the property as of January 1st of that year. So if you are buying or selling a house in August, the market value of the property may be completely different than tax value data that is at best perhaps a year old or older. The market does change both up and down.
8. If you buy a house that was under construction on January 1st, the tax value can be very different, between the value of the state of the house January 1, versus the completed value later in the year. This is obvious to most people, however I always like to include the warning here. YOUR TAXES WILL INCREASE. TAKE NOTE. SAVE MONEY. For example lets say you start construction on February 1st, so your lot was vacant on January 1st. Chance are when you close the escrow account will be set up on the most current tax data the title company and your lender have. That is the lot value. So you close July 1st and the taxes collected for your tax escrow are based on $40,000 lot value....let's say $100/month. However the completed value is $200,000 and this is reflected on the tax values that come out in April or May of the following year and your taxes are now calculated at $500/month. Your lender will not only start to collect the higher amount each month of an extra $400, they will want to make up for the deficiency where they did not collect enough for sometimes almost a year. That could mean your payment would go up by $800 a month for nearly a year. Believe me that this has caused trouble for more than one borrower. The best way to avoid this increase or surprise is to calculate what the taxes will be on the improved value. Save this money each month in a separate bank account. When your lender discovers the deficiency, pay your savings into the escrow account.
9. CAPS....in some places there can be caps on how much the taxes or values can go up each year while the same owner is in the house. Typically these caps are removed when the house sells to a new owner. So if you are buying a home that has been owned by the same owner for a long period of time perhaps 15 or more years, be warned that the tax value may change significantly with your purchase.
10. There can be large disputes in tax values. Less likely on residential properties, but this is certainly the case on commercial properties. There are even examples of multimillion dollar fights for tax valuations. Look up articles on the Gaylord Texan Resort in Grapevine which at one time was fighting over $100,000,000 in tax valuation.
11. Lastly remember that even if there is an actual person who has reviewed the tax value of your house and set the price, they have likely never been in your home, in your neighborhood, and perhaps never in your city. Why would you depend on the value they set for a home in this case. I would guess most of my buyers or sellers could do a better job of pricing the home than a tax appraiser who has never seen the home.
How to Fight Your Appraised Value
Most homeowners will need professional help to fight their appraisal. There are many companies that you can pay to fight for you. If you need recommendations please contact me at rb@teamlynn.comor give me a call at 214-675-6992. If you decide to fight the value yourself, make sure you go armed with pictures and data. Take CMAs from realtors, take vehicle traffic counts from your city. Take pictures of properties. Take flyers of properties advertised for sale. Take a sales contract. Take a bank appraisal of your property. Remember the value you are fighting is the value at January 1st of the tax year. You will want to use prices of competitive properties that were sold as close to January 1st as possible. In some cases the tax appraiser may ask you to pick 3 properties you feel are similar in value. Pick the 3 lowest. They don't play fair and often will pick the 3 highest. If at all possible pick values of homes that were sold as close to January 1st as possible. They may not do this on their side and this can be used in your argument against them. Take economic reports that show values have dropped. We see this in the newspaper every day. Take data to support your position. Even fighting just $1000 in tax value can add up over the years.
Use a Realtor to determine Market Value
So the lessons here are that if you are buying or selling a home, use a realtor to help you determine current value. Don't rely on tax value as any determiner of market value. Tax values are no indicator of good or bad deals. Paying under tax value is no basis for getting a good or great deal. Likewise paying over tax value or even significantly over tax value is an indicator of a bad deal. Every property is different and you should consult with your realtor about current market values and make offers based on those numbers, never on the tax appraised values.
Major Tax Appraisal Websites
Collin County Central Appraisal District
Dallas County Central Appraisal District
Denton County Central Appraisal District
Tarrant County Central Appraisal District
TaxNet for many other Texas Counties
Texas CAD -Online Texas Appraisal Districts
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