Evaluations On The Cheap
By Charlie Elliott, Jr., MAI, SRA

Needless to say, there is a public record of a calculated value of most, if not all, real property in the United States. It is the property evaluation performed for the purpose of property taxation.

The nice thing about these property tax evaluations is that they’re cheap, or in most cases, free and, since they have already been completed, there is virtually no turnaround time. The trouble is, these evaluations were completed, in most cases, a long time ago, so they really don’t reflect current market value of the property, if they ever did. Their accuracy, even when they were brand new, has to be called into question.

It is not unusual for a commercial bank to use property tax values for small loans or loans with low loan-to-value ratios.

Of course, an evaluation for tax value does not qualify as a certified appraisal and, therefore, cannot be used for most mortgage loans. That means a lender can’t use a tax evaluation for any federally related transactions. So if the loan has anything to do with Fannie Mae, Freddie Mac, FHA, VA, credit unions, banks, savings and loans or other entities that require backing in any form by the federal government, forget about using the tax evaluation in lieu of an appraisal.

There are cases where a lender wants a certified appraisal even when it’s not required. Sometimes the posted tax value on a house is so old and so low that the owner feels his or her property is worth a lot more. This owner would be seeking a loan higher than the one the tax value would permit. Therefore, an appraiser is contacted to determine a more accurate value of the property, thus, increasing the possibility that the loan can be made.

While a certified appraisal is one where the appraiser typically visits and inspects the specific property in detail, that is usually not the case on tax evaluations. Most counties or jurisdictions employ a company that specializes in mass appraisals for such a purpose. The company might have, say, 100,000 parcels of property to evaluate in a period of, perhaps six months or a year. This would, obviously, prohibit personal inspection of all the property in the jurisdiction. Appraisers will personally visit some of the property, but most of it tends not to be looked at any closer than one looks at a house from a vehicle riding down the street. Some tax offices are staffed by certified appraisers, and the evaluation process they go through meets the Uniform Standards of Professional Appraisal Practice for mass appraisers, however, their work typically does not qualify as a certified appraisal.

Needless to say, you can’t expect such evaluations to be nearly as accurate as certified appraisals. According to Consumer Reports, an error rate of 40% exists in estimating property taxes. The National Taxpayers Union has stated that 60% of homeowners are over-assessed by these mass property value determinations. Of course, when property owners feel the property tax value on their homes are too high, they, more than likely would appeal. But what do you think they would do if the tax valuation figure comes up lower than they expected? They would be as quiet as a baseball manager who saw an umpire call his player safe, when the player obviously was out. Only in this case, there would be no one to argue for the other side, so the low value would undoubtedly stand.

Not only would such a value stand, it would probably stand for a long time. These revaluations are rarely performed on an annual basis. Some government entities go as long as eight years before re-evaluating real estate for tax purposes. A lot can happen to real estate in eight years, both good and bad. Improvements are rarely noted during a period between revaluations and, more often than not, overlooked during the next mass revaluation.

On the other hand, a certified appraisal generally represents current market value. After all, that’s what a lender needs to know about the collateral being offered for a loan.

So while a tax valuation figure is often obtainable with only a few mouse clicks on the Internet, it can’t be used if the law requires a certified appraisal. And, if there is any significant question about the value of the property or the ability of the collateral to cover the loan, an accurate accounting of the current value is necessary.

The few cases where a certified appraisal is not necessary would be ones where the amount of the loan may be immaterial or the borrower was essentially getting the loan on the strength of his or her signature. The house, in a case like this, may be thrown in as collateral, but for all practical purposes this is not a true mortgage loan.

In other words, using a tax assessment value is cheap and fast, but if the collateral is to be used to its maximum effect or if the lender needs to know that the loan is adequately protected, a certified appraisal is indeed necessary.

Charlie W. Elliott, Jr., MAI, SRA, is President of ELLIOTT® & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or at charlie@elliottco.com or through the company’s Web site at www.appraisalsanywhere.com.