Property Valuation – Which is Correct: Appraisal, County Tax Assessment, or Zestimate?

People frequently try to determine how much their house — or a house they're considering buying — is worth. We hear about comparative market analysis (CMA), appraisals, assessments, Zestimates, and automated valuations models (AVMs), all as tools to measure the value of a property. So which one is correct? Surprisingly, not a single one. While those tools may help you ascertain a value range, the true worth of a property to you is entirely subjective. In fact, it's whatever you are willing to pay for it! Nonetheless, let’s discuss a few of these terms to help you better understand different valuation approaches and methodologies when it comes to putting a price on your home or another property.

Appraisal for Valuation – An appraisal is an independent estimate of value for a particular property, usually done as a part of the purchasing process. The appraiser, who is generally governed and licensed by the state, is typically hired by the mortgage lender to estimate the value of the collateral (the property) for mortgage lending purposes. The lender will generally only lend money up to a certain value of the property, like 80%, and they use the independent appraisal to determine the value of the collateral. An appraiser is independent, neutral, and unbiased.

Comparative Market Analysis – Unlike an appraiser, CMAs are usually done by real estate sales professionals for a client, so it may not be as neutral and unbiased. The salesperson will query a database of similar recent sales of homes and compare these to the target home in question. By adjusting for different sizes, numbers of bedrooms, lot characteristics, conditions, locations, etc., an agent and buyer should be able to come to a conclusion on a range of value for a particular property. This is really a tool to help the buyer determine a reasonable valuation for offer and negotiation purposes when shopping for homes. However, a buyer needs to be cautious here and carefully review the data that went into the CMA, and analyze it for him or herself because the agent may have a financial incentive to suggest or skew the estimated valuation one way or another.

County Property Tax Assessment – The county you live in also probably does some type of a valuation for determining how much you will pay in property taxes. This is called an assessment. However, relying on an assessed value for your purchasing decision is not a good idea. The county assessor, probably via a CMA-type process, comes up with a valuation of your property every few years. This valuation is multiplied by the local property tax rate (millage rate) to determine how much you owe in property taxes for the year.

Some jurisdictions reduce the assessed value or only use a fraction of the CMA value for determining the property’s assessed value. If your state uses a fraction of the market value for their assessed value, they may have a higher millage rate to make sure they collect enough property tax revenue from you! Obviously, a county that uses reduced valuations is not a good gauge of the property market value for your purposes when purchasing property.

But one exception state to the assessment process is California. Voters became tired of ever-increasing property taxes and voted in Proposition 13 in 1978. Assessed values are 1% of your original purchase price and can only go up 2% each year. Because of this, there are individuals who purchased their homes decades ago whose annual property taxes are only a fraction of their neighbors’ who purchased more recently. My neighbor and I have very similar current market value 1,300-square-foot houses. But her current county-assessed value from her 1963 purchase price of $25,500 has increased to $80,000 today, so her 2012 property taxes were $850. On the other hand, my assessment from my 2003 purchase of $565,000 is now up to $650,000, so my 2012 property taxes were $6,700. That is a pretty big discrepancy in values if one uses assessed values as a gauge of market value. As you can see, California assessments are useless for determining market values. Prop 13, the third rail in California politics, is interesting, and there are many pluses and minuses to it, which you can read more about here from the Howard Jarvis Taxpayer Association.

Zestimates and Automated Valuation Models (AVM) – Automated valuation models came into play about 10 years ago to help reduce the cost of buying a home. Freddie Mac and Fannie Mae developed sophisticated computer modeling systems to help their companies reduce risk. These models take lots of data and also do a CMA-type analysis to determine value. Companies like also use a similar AVM process to determine a market value of a property. Keep in mind that AVMs are only rough gauges of value, but they are often pretty good. Regardless, there are endless questions from individuals regarding their belief that their property is worth more then an AVM computer model predicts. So AVMs are just one more estimate to help you with a valuation.

As the buyer, you can use any or all of the above valuation methods to help you make a good purchase decision. Nothing, however, can supplement your own thorough review of comparable market sales of nearby properties. And doing that common sense valuation is your job!

Finally, a property's value, like beauty, is in the eye of the beholder. So when you are ready to write the check to purchase a property, remember that in the end, only your estimate of value counts!