Tax Assessment vs. Appraisal

[Josiah Cooper]

Hello BP Community,

We purchased a foreclosure and the appraisal came back with the Tax Assessment at $129,500 and the appraisal price at $85,000. On the appraisal it looks like they used other foreclosures in the area for comp's (one comp sold at $32K). I talked with my real estate agent and he reassured me that it will sell in the $115k+. From what I know/read, the Tax Assessment price is usually a % of the FMV unless you live in CA, we're in Alabama. So I am just trying to see if there is anybody that has gone through a similar situation and what their end selling price was. This may be a common, but this is our first rehab so I feel like we are in unfamiliar territory. Thanks again for all of your comments.

[Edward B.]

Josiah,

Of the two, the appraisal is more likely to be correct. Tax assessments are typically done in bulk and at set times (i.e. once a year, once every two years, once every five years, etc.) Also, like you mentioned, often times they will be low to discourage people from challenging them but since they aren’t a true reflection of the market or situation that is not always the case. What you could do is challenge the assessment with the appraisal but if you aren’t looking to hold the property I doubt that you would care.

I would be concerned that the appraisal could affect a buyer’s ability to get financing. I believe there are situations where you have to disclose if an appraisal has already been performed. I am not really sure how it would work so I will let someone with more experience chime in, but if you have to use that appraisal then the banks will only lend on that amount. Thus, even if your agent can sell the property for $115k your buyer would have to bring a ton of money to the table since the lender will be looking at 80% of $85k. Again, I am just basing that off of wanting to go with another lender once because of a lowball appraisal and being told that it wouldn’t matter because the appraisal would follow me. May be different in your state or your situation, I honestly don’t know so look into that. Otherwise, the property is worth what someone else will pay for it not what it appraises for.

You can challenge the appraisal but that is easier said than done. I am currently working my way through some old podcasts and I believe Podcast #007 (http://www.biggerpockets.com/renewsblog/2013/02/28/ryan-lundquist-podcast-appraisals/) was with an appraiser and he talks a little bit about how you may go about that.

One other point, if the appraisal was “as is” instead of “as renovated” then I would think you should be fine. You should be able to get an “as renovated” appraisal but there may be issues with lender’s who want to see some seasoning before they will accept a new appraisal. A rehabber should have more experience with this, I am mostly a buy and hold guy. If the appraisal was “as is” though, and you bought it as a foreclosure, then foreclosures are the most comparable…right now.

Ed