Sunday, November 16, 2008

Real estate editor Maryann Haggerty and columnist Elizabeth Razzi respond to a question adapted from a recent online chat.

Frederick: The terms "selling price" and "fair market valuation" are confusing me. The disparity between the two prices seems to be growing, rather than converging. If the price where I find a buyer is $135,000, yet the property has a tax basis of $240,000, is this an indication that something is wrong with the pricing logic in the system?

Elizabeth Razzi: These different valuations have different purposes. Let's work backward to figure them out. "Tax basis" simply refers to the amount you invested to buy and remodel the property. The figure is used to calculate your capital gain when you sell.

"Fair market value" is a price estimate determined by an appraiser when you apply for a loan, or by the property-tax assessor. Either will compare your home to similar ones that have sold recently. Those estimates can lag current sales prices when markets are changing rapidly, especially when it's a tax assessor crunching the numbers. In Maryland, the government calculates new fair market values every three years, which means those numbers will tend to be high when market prices are falling, just as they lagged when prices rose. Many other jurisdictions assess annually.

Maryann Haggerty: The comparable values that you deal with when you're buying, selling or refinancing a home are based on recent arms-length selling prices. (The treatment of foreclosure sales is more complex. They're not considered arms-length, but when they become a major force in the market, they need to be taken into account.)

An appraisal used for a home purchase is usually custom-made, while tax assessments are done in bulk and according to a formula. The values that really count in a home sale are the sales price and the appraiser's fair market value, not the assessed value.

The next Real Estate Live chat will be 1 p.m. Friday.