Tax assessed value 120k less than asking

[Kody Henderson]

Looking for advice.

I found a small multifamily for sale and the tax assessed value is $120k less than the asking price. Rents are slightly below market and has long term tenants in place.

At the full asking price the property would cash flow about $500/month with 20% down at current rents. With a 13% ROI

At the tax assessed value the property would cash flow approximately $800/month at current rents with 20% down. This would make a 18.5% ROI

Should i try and negotiate the price down?

What would be the best way to go about this?

The property cashflows at full asking but 120k above the tax assessed value seems a bit high.

[Steve K.]

You can always make a lower offer but I wouldn't use the tax assessed value as justification, as that amount doesn't necessarily reflect the current fair market value of a property. 

Tax assessments are a mass appraisal process towns perform to bring their tax base valuations up to current market value in order to redistribute the tax burden fairly among all property owners. Reevaluations are sometimes only done every 10-15 years (more often in high appreciation markets). Sometimes added assessments for improvements are done to properties in between reevaluations to bring the property closer to market value, as the tax assessor will add the improvement value to the market value of the home. Reevaluations are also sometimes done after a property is recently sold if the sales price is much higher than the most recent tax assessed value. Taxable value itself is the percentage of a property's assessed value less any exemptions such as depreciation of the property. The percentage of the taxable value of any property that's assessed varies widely and depends on locality. For example one county might tax properties based on 10 percent of assessed fair market value, while another might assess at 35 percent which could explain why the tax assessed value for this property is $120k less than asking price and is also why not many people use the tax assessment as a tool for determining true fair market valuation. 

Tax appraisals also use different methods than appraisers do: they use a blended approach that considers the replacement cost (cost to rebuild) and a smaller portion is the recent comparative sales approach (comps). The cost numbers are generated by the state and are updated frequently as cost of materials and labor constantly adjust. They check that value using recent sales to make sure that it is roughly in line with with the market, however, markets change very rapidly (especially lately) and have some seasonality so unless the reevaluation was done in the past few months, the cost basis for the tax assessment would not be accurate to true market value today even if tax assessors were using the same techniques as appraisers. 

You mentioned its a small multifamily. If it's 4 units or less, appraisers will use recent nearby comps (similar properties sold in the past 1-6 months, within 1 mile if possible) to determine the current appraised value, similar to a single family home.

If it's larger than 4 units (considered a commercial property), appraisers will use the income approach which looks at net operating income, average cap rates for the location, rental and vacancy rates, prevailing market conditions, physical condition, etc. The calculation also includes current interest rates and a potential investor's rate of return on investment and will usually be blended with a comparative market analysis if a similar property sold nearby exists.

Hope that helps! A good buyer's agent can guide you through the buying process, help you make a strong offer and check your cash flow analysis as well to make sure you're running those numbers accurately. Good luck!