Each city and town has an Assessor's Department that annually determines the value of each parcel of real estate. The property tax rate is applied to those values to determine how much tax each owner owes.
Theoretically, the assessed value is tied to the market value of the property. However, as I've previously blogged, it's challenging, if not impossible, to accurately estimate a property's market value based on a statistical model, and especially without actually visiting.
So, how accurate are the town tax assessments? It's easy to check, since both tax assessments and sale prices are public record. Let's look at condos that have sold so far in 2017, in Brookline, Newton, and Cambridge.
On average, sale prices have been approximately 20% higher than the assessed value. This implies that towns are leaving money on the table by assessing less than the actual market value. However, that's only part of the story. There is actually quite a bit of variance, with some sale prices far above and some far below the assessed value, which means that some owners pay more and others pay less than their fair share of taxes. This illustrates just one problem with funding local government through property taxes.
|Sale price as % of tax assessment (average)||119%||119%||123%|
|% of sales that were below the tax assessment||16%||17%||8%|
|Highest sale price over assessment (as %)||168%||167%||118%|
|Lowest sale price over assessment (as %)||-57%||-35%||-24%|
|Sample size (condos sold 2017)||90||110||77|
What could cause a property to be assessed at less or more than its market value? Taking the Brookline Assessor's office as an example, they use data from the previous year's sales to run a statistical process, known as a regression model, on approximately 30 attributes, including square footage, number of bedrooms, number of bathrooms, style, and condition of kitchens and bathrooms. If any of that data is incorrect or incomplete, it skews their estimate. Additionally, they are only able to visit "a couple hundred" homes in person each year, so they don't really know the condition or renovation status of most properties. They do look at building permits, but that only tells part of the story. Furthermore, since they use the previous year's data, and only update once a year, they are by definition a lagging indicator.
Online estimates, such as the Zillow ZestimateTM face the same challenge. Zillow reports that, as of February 7th in the Boston area, only 49.9% of their estimates are within 5% of the actual sales price. In other words, even with teams of private sector data scientists, homes are just not standard enough to accurately predict their market value using statistical models alone.
What about real estate agents; are we more accurate? On average, the sale price for condos in these towns was approximately 1.2% above the list price. Pretty close! In other words, if you'd like a more realistic estimate of your home's market value, you should call a real estate agent. I'd be happy to assist.