Assessed Values – a double edged sword

It’s that time of the year again in Michigan when people line up at their local townships to take their 5 minute shot at getting their property taxes lowered…yet again. The local assessors have been lowering property values rather dramatically the last coupel of years, especially since they switched over to using a single year’s worth of sales data, instead of using the old two years worth method. Still, they are running behind, because their data is always behind and property values continue to drop on the market.

The current assessed values may be as much as 20-30% high, compared to what the market will bear for you home. How can I say that? Well, I track what hoes in my market areas are selling for and look at how the sale prices compared to the SEV at the time of the sale. Remember that the SEV (State Equalized Value) is supposed to represent ½ of the local market value; at least that’s the theory.

The assessors look at what comparable homes have sold for in the local area over the last 6 to 12 months. They assign values based upon several factors – the value of the land and the value of the improvements (the house and any outbuildings) on the land, being the two biggest factors. You should ask to talk to the assessor to find out exactly what factors s/he used in reaching a value for your property.

In general, if everything were “normal,” one should be able to double the SEV for a home to arrive at a reasonable approximation of its market value. Things have not been “normal” for quite some time. In the heady days of rapid appreciation leading up to the bust the Sold price to SEV ratio was often well over 2.0 – averaging about 2.2 in this area. That meant that one had to bid more than twice the SEV in order to buy the house. The assessors couldn’t keep up with the rapid appreciation in those days.

When the bubble burst and home values began dropping at double digit rates, just the opposite happened. In fact, because of the old method of assessors using two years worth of sales data, they actually overvalued the market by a full year, until the new, lower prices sales data caught up. So, SEV’s actually continued up even thought the market had started tanking. Ever since, the assessors have been playing catch-up with a continually declining market.

So, here we are in 2011 with market values still declining and SEVs still trying to catch up (or catch down, if you prefer). The best guess by local economists and pundits is that it will be 2013 before we see the return of positive appreciation in local housing. What you can see coming is another miss of the change in direction by the assessors. They are now using one year’s worth of sales data, but that year will still be the past year, once the change happens. Why is that bad? Why have I called it a two-edged sword?
In addition to being used as the basis for calculating your taxes, the SEV is often used by buyers and Realtors® to give them a feel for the value of the house and to guide them in making bids. The current multiplier is not 2.0. It has been running around 1.6 to 1.8 in most of the surrounding markets. If you take into consideration the distressed homes that have sold in those markets, it is actually lower – between 1.4 – 1.6 times SEV. So, a house with an SEV of $100,000 is not worth $200,000 on today’s market, but rather about $160,000 to $180,000, according to current sales data.

What happens if, in the next couple of years, the market turns around and starts back up; but, your assessed value keeps going down, let’s say to $80,000, instead of the $100,000? Now the buyers and agents see your house as being worth only $128,000 to $144,000.

You may have been happy initially with the lower taxes on the reduced SEV value, but now you want to sell at a price that you perceive your home to be worth (which is always higher than the real market value and is now also higher than the SEV value would indicate). It might take a full tax year for the local assessor to catch up with the now appreciating value of your home and adjust it in an upward direction.

This is one of those “can’t have your cake and eat it too” conundrums. If you keep fighting and fighting to get your SEV lowered, so that your taxes are lowered, you are also lowering the perceived value of your home in the market. The turn around, when it does come, is not expected to result in quick, double-digit appreciation that will recoup lost value quickly. Instead a return to the historic appreciation curve of about 3.5-4% per year appreciation is expected.

So, if you are successful at your challenges to the SEV and taxes on your home and succeed in getting your $400,000 home (at 2005/6 peak prices) reduced to a SEV value of $110,000 for tax purposes; don’t be disappointed if no one will pay you $300-400K for it when the market turns around. You have established that you house is only worth between $176,000 and $198,000. You might have to wait a decade or more to regain the lost value.