Sales concessions affect property value increases
Submitted by Richard E. Martin, Avon
I read with interest, your article, regarding Livingston County property values.
The most specific point of interest was your comments, increasing values with decreasing sales. I think most would agree this defies real estate logic.
I would argue the value of the data is skewed, to the extent, that original values are incorrect and many recent sale prices do not reflect market value, therefore it follows that statistical data must be incorrect.
Assessment information is derived from the sale price of homes, assuming those sales are arm’s length transactions, as you pointed out in your article.
Remember there is a difference between price and value. Price is what a typical (not average), purchaser pays for the real estate at a specific point in time.
Value is what the product is worth to the typical purchaser, again at a specific point in time. Assessment data assumes price and value are the same and that may or may not be true depending on other factors.
To illustrate the difference between price and value we will use an automobile purchase as an example. The price is $25,000 and there is a $5,000 rebate. Hence the price becomes $20,000 and most likely represents value.
The vehicle’s value is at the most, $20,000 because when you purchase and drive out of the dealership you don’t have any rebates to offer so the most probable selling price is a maximum of $20,000. The term for rebates in a real estate transaction is concessions.
With that example, I’ll show how concessions skew real estate values. Remember concessions are the dollar amount (or tractor, lawn mower, anything of value) a seller of real estate gives a buyer that entices the purchase of real estate.
I researched 193 sales in 5 towns in the previous 18 months. The homes researched, sold between $50,000 and $150,000. Data was derived from the multiple listing service. Of those sales 62 reported concessions ranging from $500 to $8,000. P
lease note there were probably more sales with concessions because they are not always included in the data system. Also not included are private sales so the numbers, statistically, probably exceed the numbers I encountered.
A typical concession was in the $3,000-$5,000 range. If you purchase a home for $100,000 with $4,000 in concessions the price is $100,000 less the concessions for a value of $96,000.
You must also consider the present federal enticements to purchase a home. Take the same home, with a value after concessions of $96,000 and deduct an additional $8,000 in tax credits. The price lowers to a value of $86,000. According to an assessor this home is worth $100,000.
Hogwash. Using assessment information one would think we have increasing property value when in fact, considering concessions, property value may well be flat to declining.
In some cases, foreclosures may be a better value indicator because generally they sell for cash or an equivalent and without concessions. Assessors never consider concessions although they have a dramatic impact on value. This practice has been going on for years and the trend is spiraling upward because some purchasers need additional cash to purchase their dream and the only person with the cash is the seller. It is an easy problem to correct.
Real estate brokers can accurately report concessions in the sale data, and attorneys can check real property forms to indicate a non-arm’s length transaction, or real property can research to provide truly accurate sale information. This is the identical situation that occurred with real estate in other parts of the country. Everyone has a false sense of the actual properties value.
Lake properties lack comparable sales
Waterfront, waterfront view and deeded access are a different animal. The valuation problem is the lack of truly comparable sales. The tendency is to use sales that are not comparable.
I have recently heard people talk about all the waterfront sales in the last three or four years. This is a huge mistake, in the valuation of real estate particularly with waterfront property.
An analysis of sales requires a time frame that can be quantified whereby an accurate representation of trends can be determined. That is the reason appraisers prefer 3 months or less for comparable sales extending to a maximum of one year if necessary.
On Conesus Lake, it is reasonable to say that differences in just the land can be found with every single property. Therefore how can anyone pick a number and say land is worth so much a foot? That is just plain ignorance or a lack of training. T
here are multiple towns, varying lot sizes, front feet and square feet, treed, no trees, secondary roads, primary roads, rights of way, steep, not so steep, flat, deep water, shallow water, west sun, east sun, bad neighbors, good neighbors and so many other value variables.
The homes may have 2,000 square feet on one level or 2,000 square feet on two or three levels, age, condition, view, porches, patios and the list continues. The only correct way to value waterfront property is to retain a trained professional that understands the specifics of waterfront type property. It cannot be quantified with a few sales.
From my perspective assessors are understaffed, underpaid and overworked. It is a no-win position with the politicians wanting more and the public wanting less. Too many people rely on assessment information and it is extremely important to provide the most reliable data that can be obtained.
As your publication previously reported, with Western New York having the dubious honor of being in the top 10 taxed areas in America (ratio of taxes to value), the public should stand and demand change. They can certainly demand a tax system that is equitable.
Richard Martin is a retired Certified General Appraiser.