Whether you are buying or selling a home, you should know the difference between assessed value and market value. They are two different numbers, sometimes vastly different, that affect your purchase/sale in various ways.
Explaining Market Value
A home’s market value is the value of a home based on the current market conditions. It’s a snapshot value of the price sellers expect for their home. Appraisers base the market value on the most recent sales prices of similar homes in the area. Appraisers should use sales within the last six months of homes of similar size, model, and features. If the appraiser can’t find identical home sold recently in the area, he can use ‘similar’ homes and make adjustments accordingly.
Buyers and sellers can both use the market value to their advantage. Buyers use it to understand the ‘going price’ for homes in the area. If the market price is higher than a buyer’s budget, they have to either move onto a different area or wait for values to fall. Buyers can also use the market value to determine the approximate maximum amount a lender will loan them for homes in the area. Lenders won’t offer loans that exceed the market value of the home. They typically also won’t allow financing on homes that the buyer pays more than the home’s value. This only puts everyone in a bad financial position.
Sellers use the market value to determine a fair listing price for the home. Sellers can ask more or less for the home, but the market value is the maximum they should allow if they want a buyer’s financing to go through. Sellers can use the market value as a guide to keep their expectations for the amount they receive for the home realistic. It also helps sellers stay competitive in the real estate market.
Explaining Assessed Value
First, you should know that an appraiser doesn’t determine the assessed value of the home; an official county member will do so. The job is usually given to the town’s assessor, but your area may have a different name for the person in charge of this.
The assessed value process starts similar to the appraised value. The assessor looks at the recent sales prices of homes in your area that are similar. They also take into consideration improvements you’ve made on the home and whether or not you rent the home out to a tenant. Finally, they look at what it would cost to replace your home should total disaster strike.
Up until now, this all sounds just like the market value, but here’s where the difference begins. The assessor takes the value he derived using the above factors and multiplies it by the assessment rate. This percentage is stagnant across the county. On average, you can expect it to be about 80% of the derived market value. The county then uses this figure to come up with your property taxes. Obviously, the higher the assessed value is, the more you pay for taxes.
In some counties, you can fight your assessed value, especially if you think it’s unfair compared to other assessed values in the area. Because it’s based on human input, there is a chance of mistakes, which homeowners should make sure doesn’t occur.
The Main Differences
As you can see, market value and assessed value have many similarities. They are both dependent on the market value. But they have their differences:
- Assessed value most affects your taxes. If you are buying a home, you may not pay much attention to the assessed value unless you are trying to figure out the property taxes.
- Assessed value can help buyers in certain situations, though. If the assessed value is significantly lower than the seller’s asking price, the buyer may bring up the disparity in the values. It could help the buyer negotiate a lower amount.
- The market value is the only value lenders use to determine your loan-to-value ratio and if you qualify for the loan. The lender doesn’t care about the assessed value unless the appraiser notices it’s completely different than the market value, as it could raise a concern with the affordability of property taxes in the future.
As a buyer or seller, you should know both the appraised value and market value of a home. It helps you be a more informed buyer or seller. In the end, the market value is what determines your eligibility for a loan, though. As a buyer, you may want to put more emphasis on that value.Click to See the Latest Mortgage Rates»