After my last e-mail regarding fire preparations everyone should take (if you missed it: http://cohardmoney.com/blog/2013/06/colorado-wildfire-seaso-are-you-prepared-2/ ). I received a number of questions. What is replacement cost? What does this have to do with tax value? How about market value?
Unfortunately the three terms: replacement cost, market value, and tax value are three very distinct calculations that may not have good correlation amongst each other. In this e-mail I’ll explain the definition of each term and when each is utilized.
First, what is replacement cost? This is an insurance calculation that specifies how much a building/structure would cost to replace at its pre loss condition. This number is basically the amount it would take today to rebuild/repair a property if it were damages. It is important to note that the replacement cost is not “what your property is worth”, it is merely a calculation of what it would cost to build the house. To accurately determine replacement cost of a property an agent goes room by room assessing the floor coverings, building construction, finishes, etc… The replacement cost number is typically only important in a loss situation and/or to set your current insurance rates.
Next, what is tax value? Tax value is an “estimate of market value”. The tax assessor looks at similar properties (same neighborhood, square footage, builds type, etc…) to estimate the taxable value of the property. The appraisers in Colorado do not physically inspect every property (it is not feasible from a timing and cost standpoint) so they develop computer algorithms to best estimate the value of a property. This is why everyone should closely look at their tax bill and appeal if their property is overvalued (http://cohardmoney.com/blog/2012/05/its-tax-time-in-colorado/ ). The tax value is used by the assessor in order calculate the amount of taxes to be paid by each property owner.
Sometimes the tax values are pretty close to market value and sometimes they are considerably off. For example, I inspected a property in parker (all the houses in the neighborhood were built in similar years, similar build quality, style, etc…). In this case the tax value was pretty close to the actual value. In a separate situation, I inspected a property in CO Springs that was assessed at 160,000. When I looked at comparables in the area, the house was only worth around 100k. So tax value can vary significantly from the actual market value and should be taken with a grain of salt when evaluating a property.
Finally, what is market value? Market value is what a typical buyer should pay for a property based on current market conditions (here is an interesting article from today’s Denver post that is pertinent to this topic: http://www.denverpost.com/breakingnews/ci_23475772/colorado-housing-market-buyers-caught-price-squeeze ). Basically market value is what a house should sell for today under normal conditions. This does not mean that buyers and sellers always act in a rational fashion. Banks and other lenders utilize market value to determine loan amounts. Many times buyers and sellers pay higher than the market value. Stay tuned for future articles on how I determine market value of a property.
I hope this answered the questions I received after my last e-mail. If there are real estate questions you have, feel free to e-mail me and I can address them. Also, please check out our facebook page (https://www.facebook.com/fairview.lending.9 ) which shows some of our recent closings (In the last couple weeks we have closed loans in Breckenridge, red feather lakes, Denver, and steamboat). If you haven’t recently been to the high country, the wildfires are starting their annual bloom. I look forward to working with each of you on your private lending needs in the future.