Both buyers and sellers often ask us about the relationship between their municipal evaluation and the actual market value of their house. Given that we get this question often, it seemed appropriate to explain the basics.
A property's municipal evaluation is the value that the local city (or borough) uses to determine the amount of property tax that owner will pay. The theory is that the evaluation is supposed to reflect the market value of the property. However, achieving this is easier said than done. Evaluations are revised every 3 years and often have a "built in" increase over the 3 years. Even with the increases, they often lag behind the market - especially the last 10 years or so, when we have seen significant appreciation in our local real estate market.
The evaluation of a given property takes into consideration the location, lot size, building size, number of bedrooms and bathrooms, etc. Extras like garages, extensions and pools are also taken into consideration. City evaluators seldom actually visit the property unless there is a significant renovation that requires permits. Given that the maintenance and improvements on a given property can vary greatly over time, it is easy to see how a home's market value can trend away from its evaluation.
Consider this example - 2 bungalows in Beaconsfield south were both built in 1960. Both homes have 3 bedrooms, 2 baths and a garage, and both are on 9000 sf of land. Both homes have a tax evaluation of approximately $340,000. One of the owners has updated all of the major mechanical systems in the last 5 years (roof, windows, furnace, heat pump) and has also recently invested in a new gourmet kitchen, updated bathrooms, and freshly painted the entire house inside and out. Few of these renovations required permits, so the evaluation has not changed much in the last decade. The current market value of the house is $450,000. The neighbour has done some updates over the years, but much of the house is original and all the mechanical components are coming due in the next 5 years. The market value of this home is $325,000. This example illustrates why we can't simply rely on a home's evaluation to imply its market value.
If we look at recent sales in our area, homes typically sell for an average of 125% of their evaluation. That is to say that on average, homes' market values are about 25% higher than their evaluations. A home evaluated at $500,000 will (on average) sell for $625,000. We do, however, see a big variation in evaluations when we look at individual homes. Older homes, which benefit from a low evaluation even if they've been extensively updated, can sell for as much as 200% of their evaluation. By the same token, homes which have not had many updates often sell at or below their evaluations.
If you are concerned that your property evaluation is too high, and you are therefore paying too much property tax, you have the right to contest your evaluation any time during the first year of the new "roll". This process can be easily done at city hall. Over the years we have helped several clients reduce their evaluations when they have been significantly above the market value of the property.
If you are concerned that your property evaluation is too low - keep it to yourself - because the most important thing to remember about all this is that a low evaluation means lower taxes!