SUMMARY:  While most homeowners are familiar with individual appraisals, real estate tax assessments are done through a mass appraisal process. This process compares the sales prices of properties sold in a given year with the previous year's assessments for those properties. A median assessment-to-sale ratio is calculated for the neighborhood and the percentage increase required to bring the ASR up to fair market value (91-95% of the sales price) is determined. The assessments for all properties in the neighborhood are then increased by that same percentage increase.

How is your property assessed for real estate tax purposes? Most people are familiar with individual appraisals in which an appraiser visits a home, looks it over thoroughly to evaluate its size, features, and condition. Then the appraiser looks for similar or comparable homes nearby that recently sold and notes the prices at which they sold. Using his or her experience and skill, the appraiser then uses those "comps" to determine a market price for the home being appraised. That's not how assessments are done for real estate tax purposes, however.

The problem is that such a process would never work in a large jurisdiction like Fairfax County in which the value of each home must, by state law, be assessed every year for real estate tax purposes. For example, the entire Virginia Hills neighborhood was evaluated by the Department of Tax Administration (DTA) in 2005, with DTA personnel going door-to-door (but not inside the homes) to check for new construction and exterior condition. DTA assessors asked homeowners to verify interior data if the homeowners were home; if they were not home, DTA left a form to be returned. It took the entire staff of DTA assessors approximately three weeks to assess the value of the 842 homes in Virginia Hills. Imagine how long it would take to do all 300,000+ homes in Fairfax County. Consequently, the County's Department of Tax Administration uses a technique known as "mass appraisal," a technique used in almost every jurisdiction in which there are more than just a few properties to appraise. This article explains how mass appraisal works.

Each jurisdiction (county, independent city, etc.) is broken down into assessment neighborhoods. Your assessment neighborhood may be your subdivision, some part of your subdivision, or several subdivisions in which the houses are of similar construction and value. An assessment neighborhood should be large enough that there are a fairly large number of sales each year; the more sales, the more accurate the assessment process will be. If 40 houses are sold in a year, that larger number will smooth out wide swings in results. If only five houses are sold, the results are more problematic.

DTA begins the assessment process by looking at all the sales in an assessment neighborhood in the previous year. They will then remove from consideration those sales that are not arms-length transactions at fair market value. Let's say parents sell their house to their child at half of what it's worth. That sale would not be at arms-length, and would not be at fair market value. While most such sales are below fair market value, it's also possible to sell above fair market value. Recent schemes have been uncovered where dishonest individuals created a string of sales at ever-increasing prices above the market in order to defraud lenders. One recent example is reported here:

Once DTA has scrubbed the sales for the assessment neighborhood and removed those not at fair market value, they then look at their assessment for each of those properties for the previous year. Next, they divide that assessment by the sales price to come up with an assessment-to-sales ratio (ASR) for each property sold. From that information they calculate the average (median) ASR for the assessment neighborhood. Then they determine how much the median ASR would have to increase to get it to their target range of 91-95% for the ASR. While it would be nice if the average assessment changed by the same percentage as the average change in the sales price, it's important to note that the two are not related in the mass appraisal process. In other words, sales prices could, in theory, go up or down by a percentage quite different than assessments.

DTA then applies the percentage change needed to get the median ASR to the 91-95% range to the previous year's assessment of each property in the assessment neighborhood. DTA talks on their web site of assessing the value of the land and of the improvements (buildings). While they may spend time deciding how to do this, the fact is that the assessment of each property goes up by the same percentage as everyone else's assessment in that assessment neighborhood for the year in question. While DTA is concerned with land values so that they can better assess empty buildable lots, and is concerned with improvement values so they can calculate the value of additions and other improvements, what DTA is really doing is starting from the overall increase and then allocating that increase between land and improvements.

If DTA learns, most often from a building permit or from the data recorded as part of a sale of a property, that construction has taken place, DTA will increase the assessment of a property by more than the required percentage to account for the construction. If a homeowner has made no improvements, however, the new assessment will just be the percentage increase described above.

Let's look at an example. The table below reflects the sales for an actual assessment neighborhood in Fairfax County in 2005 that we'll call East Glen (not its real name).

The median ASR for East Glen is .775. Doing some basic math would show that the assessments for East Suburbs would have to go up about 17.5% to get the assessments to the desired 91% level or 22.5% to get them to the 95% level.

(Desired ASR / Actual median ASR) - 1 = increase required (multiply by 100 to get the percentage increase)

Assessors test their work by calculating the "coefficient of dispersion." This may sound like some mysterious measurement, but it's actually a common statistical tool. You start with the median ASR, and then determine the difference between the median and the ASR for each house sold. That's the deviation from the median for that property. You then find the (arithmetic) average deviation from the median for all the properties in question. In the example above, that's .038. Finally, divide that average deviation by the median (for our example .038/.775) and you get the coefficient of dispersion of .049 or 4.9%. That's a good result. Assessors desire a level no greater than 15% assuming there are enough sales available for statistical validity.

If you lived in East Glen, in 2006 you would have found your combined total assessment for your land and improvements going up by 17.5%. If you felt that was too much you could appeal to a local board for review (in the case of Fairfax County, the Board of Equalization). Appeals are rarely upheld by most reviewing authorities. Homeowners attempt to challenge an assessment as if they had gotten an individual appraisal. If the local authority has properly applied the mass appraisal technique described above, absent any special circumstances, the appeal will likely be denied.

It's important to remember that the assessment of your home is only indirectly responsible for your real estate taxes going up or down. The local jurisdiction's governing authority, in this case the County Board of Supervisors, sets the tax rate, the amount of tax on each $100 of assessed value. Even if property values decline, the Board can increase the tax rate you pay; if that increase is high enough, it will result in an increase in total tax in spite of any decline in assessed value.

In the companion article to this one, we look at possible problems with the assessment process.

Copyright Forward Fairfax and Doug Boulter, 2007