BEWARE Fair Market Value

BY MELANIE ROBITAILLE SR. STAFF WRITER & GRAPHIC DESIGNER

Across North America every town relies upon a government property taxation system based on assessed property values, but what happens when these prices are misrepresentative of the actual market?

Sales Representative, Ricky Coté of EXIT Realty Associates in Dieppe, NB admits the taxation system is understandably needed, but because of its lag in his market, property values often end up off market trends. Sellers in Ricky’s market have seen a drastic uptick in property assessment values, some without having made any upgrades whatsoever. He explained this causes two major issues: increased property taxes and false resale values saying, “The assessment can be misleading when a house in a neighborhood has been neglected but its assessed value reflects the price of well-maintained houses that were recently sold in the same neighborhood. The seller will obviously think that their house is worth more than its actual value. We also see underassessed properties in remote areas where very few houses have sold in the recent year. This creates a problem for the buyer of one of these properties who wants to pay the assessed value.”

Becca Jones, Associate Broker with EXIT Realty Advantage in Los Alamos, NM sees these same inconsistencies in her market where the county relies solely on the process of sales ratio studies to assess properties. By averaging the price per square foot of homes sold in her market, adjusting for the number of bedrooms and bathrooms, homeowners receive what’s labeled as a fair market value (FMV) on their annual Notice of Valuation statement.

“As REALTORS® we know that it’s only one piece of a comparative market analysis (CMA). Often this assessment will overstate the value of a home or in many cases lag behind actual market value, ” she said, and it’s a perspective she recently expressed to her local media, because these inconsistencies have become such a problem in today’s shifting market.

“In our area currently, the FMV listed on these assessments have averaged 1-3% higher than what the home would list for. Some investors may use it as a very rough reference, but experienced buyers know they need more detailed comparables to make smart decisions.”

It’s not unusual to come across customers and clients who are unaware of what’s happening in the current housing market. This is where Ricky says an agent should be a leader in educating the public and clients explaining, “A real estate professional should be the main source of information and should be on top of the latest news, trends and market conditions that influence the market.”

Many buyers and sellers assume the fair market value shared on their assessment, from a county source, reflects what the home is worth today, but that’s rarely the case.

—BECCA JONES ASSOC. BROKER

Becca does this by utilizing tools like weekly market updates, Net-Out Sheets, and open house feedback reports to keep her sellers informed. But ingenuity at the office level is bringing agents together in best pricing practices.

“We host Broker Price Opinion tours of upcoming listings,” she shared. “We’re all experts, and getting opinions on price from five-to-six brokers helps me and my sellers feel more confident about where we’re pricing their home. Other brokers help reinforce pricing discussions and make us collaborative for the good of the seller.”

Here’s how Ricky and Becca ensure a property is priced right:

1. Educate ClientsTalk openly about the inconsistencies in property assessments and current market conditions to effectively manage expectations. Explain the real estate cycle, and how markets are shifting away from buyers to sellers, but also how that effects time on market. Pricing is a strategy best done right the first time because time on market and multiple reductions can create doubts.

2. Provide ComparisonSavvy agents have turned to CMA’s for clients right now. Ricky suggests evaluating similar houses that have recently sold in the desired area within the last 180 days for accurate data, and AI powered services like RPR or ChatGPT can help comb through this information and prepare a CMA in minutes instead of hours. Look at pending listings as well as recent sales.

3. Pre-Listing AppraisalAlthough not overly common, an appraisal before putting a property up for sale is sometimes worth the extra cost Becca explains. This step ultimately lengthens the sale process; however, it ensures a level of transparency that’s indisputable. It may also be necessary if there’s an appraisal contingency in the sales agreement.

4. The Human FactorA home is personal and saying goodbye to or falling in love with one can be much more emotional than it is logical. Factoring in the people involved in each transaction, their behaviors, and showing activity can speak volumes to who you’re dealing with and how they perceive value.

5. For the InvestorIn these circumstances Ricky finds the commonly used, simple formula of the income approach useful to estimate the value of a multi-unit. By taking the annual income of a building, then subtracting the operating expenses (not the mortgage payments) you get the Net Operating Income (NOI), which is then divided by the capitalization rate (cap rate) to give a sense of market value.

It’s no secret to agents that markets are shifting, but it’s still news to many clients. Being able to confidently guide and educate customers on true market value is the key to navigating these changing times and finding success.