The New York Times

August 8, 2004

Market vs. Appraisal: What's the Real Value?


YOU'RE in the market for a house and you've found what you're looking for: a stately old colonial on a cul-de-sac in "Our Town."

The asking price is $420,000, an Internet site says the house is worth $440,000, and the people with the BMW have their checkbook in hand. Taking no chances, you offer $420,000. The seller accepts. You chill the Champagne.

Then, trouble: the house is appraised at only $400,000. And when you get the tax records, you find the house is assessed at only $300,000.

What is going on here? "What we're talking about is a moving target," said J. P. Vaughn, the publisher of Creative Real Estate Online, an Internet real estate site at

Ms. Vaughn explained that in addition to market value homes are also described by their appraised value, their assessed value and by values calculated using automated-valuation models.

Market value, Ms. Vaughn said, is defined as the price at which a house will sell within a reasonable period of time. Using that definition, the house in the example would have a market value of $420,000.

But wait; the appraisal was only $400,000. Why wouldn't the appraised value be whatever the buyer was willing to pay?

"Because the actions of a specific buyer don't always represent the actions of a typical purchaser," said John Bredemeyer, national chairman for government relations for the Appraisal Institute, a professional organization based in Chicago.

Mr. Bredemeyer said the goal of an appraiser is also to estimate the true market value of a property, so that the lender can make an informed decision when providing a loan. That is typically accomplished by using sales of comparable homes in the area, along with a physical inspection of the house and neighborhood, to deduce market value. The mere fact that our buyer is willing to pay $420,000 does not necessarily, by itself, establish the true market value of the home.

It is possible, for example, that just behind the cul-de-sac is a busy railroad crossing. And while that might not bother our buyer, it is not what a typical buyer would want in the backyard. Hence, the appraised value an estimate of true market value is less than what our buyer is willing to pay.

(A similar problem besets automated-valuation models. While such calculators use comparable sales to estimate value, they generally do not take into consideration either the property's condition or the aesthetic qualities of the neighborhood.)

That brings us to the most confusing value of all: assessed value.

Joe Maciejewski, president of the New York State Association of Directors of Real Property Tax, said that ideally, assessed value should be the same as market value. Typically, however, it is not.

He explained that while tax assessors are required to determine the value of properties in their jurisdictions each year, they are not required to adjust the assessed value of those properties to reflect market value.

The ratio created by the difference between those two values is known as the "equalization rate."

So, for example, if the market value of a house is $400,000, and the assessed value is $300,000, the equalization rate is 75 percent. And since the equalization rate is the same for all homes in a town, local property taxes are equitably distributed. However, since equalization rates and assessment practices vary from town to town, assessed values are not a reliable indicator of market value.

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