From time to time you will see articles that suggest that small houses are over-assessed, and large houses are under-assessed. This usually provokes outrage - it seems like an attack on the poor being funded by the rich! But is that what is really happening? Not likely.

Why Would Assessments Be Wrong This Way?

This particular kind of error is pretty common, and almost unavoidable. Most assessing agencies use some sort of sales based analysis for housing. A common form of this is called multiple regression analysis, or “MRA”. Done properly, MRA can be a very powerful tool for mass appraisal - which is what assessing agencies are practicing. MRA is useful, but it is not without its biases.

In its most basic form MRA involves averaging. By comparing sales of many properties an estimated value for different components or characteristics can be teased out of the data. Have sales of two nearly identical houses, but one has a fireplace and one does not? Now you have an idea what fireplaces are worth. Two very similar properties sold, but one is beside a landfill - now you can see how that affects the value.

With MRA hundreds or thousands of sales are considered, and trends are observed. Average values for a wide range of building elements and features are developed, and these are used to estimate assessed values for all properties - those which sold, and those which didn’t.

It is the word ‘average’ which gives away the issue. Most of the sales are likely to be somewhere in the middle of the pack. Neither the smallest houses in the poorest neighborhoods, nor the biggest houses in the richest neighborhoods, make up the majority of the sales data.

Instead the bulk of the available sales data lies somewhere in between. This data tends to ‘pull’ the values toward the middle. So if in your city most of the sales involve houses trading for between $800,000 and $1,000,000, then values will tend to be pulled in this direction. A house objectively worth $400,000 may end up assessed at $440,000, and a house worth $1,500,000 may end up assessed at $1,400,000. It isn’t a conspiracy to punish the poor.

Many years ago (when I still did residential property assessments) I was the assessor on an appeal of a house which was objectively more valuable than the highest valued house sale in the small town. The owner wanted his assessment lowered to the level of the largest house. I stood by my value, and the Board agreed, but the owner was not happy. In truth though his house was probably worth more that the assessed value, but the available data wasn’t enough to prove it.

Can Anything Be Done?

This isn’t to say that the situation is hopeless. Careful analysis by those doing the assessments can (and does) help greatly. Many feel that more frequent reassessments can help to continually improve the quality of the assessment roll. (Check out this link for one perspective on this issue - HERE). And being vigilant with you individual assessment(s) is key.

What About Business Properties?

Most large business properties (the type I consult on) are not valued based simply on sales, but similar errors can creep in. There is a definite tendency for assessors to rely on blanket policies for issues such as functional or economic obsolescence. Such use of ‘standard’ adjustments does exactly the same thing was we see with houses - the adjustments will often be in the ‘middle’, and not really reflect the situation on the specific property. Such errors occur in both directions - complex properties can either be under or over-assessed. Of course, sometimes the assessors get it right. I was an assessor for over a decade, I have to believe I was right at least most of the time. :)

In charge of property taxes for a commercial or industrial property with a large assessment? Or are you a municipal employee faced with an appeal on a major taxpayer? Fill out the contact us form - HERE - and let’s have a conversation.