Sometimes understanding home values can be tricky. When you are not in the real estate industry, things like market values can be a foreign subject.
Several terms get thrown around, which can be confusing. You might hear assessed value, appraised value, and market value. All three of these real estate terms have different meanings.
We will look at all three so you have a better understanding when they are brought up. It is essential to know what they mean, so you don’t make poor real estate decisions.
Each of them is very different from one another. Let’s have a look.
What is assessed value in real estate?
The assessed value is an assigned placeholder for what the local government deems appropriate as an amount of taxes needed to cover local appropriations charged to the city or town.
In other words, the assessed value is what the local government has determined the property is worth for tax purposes. The market value is what a buyer is willing to pay for the property.
A property’s assessed value is rarely the same as the market value. See assessed vs. market value via Maximum Real Estate Exposure in the reference above to get an in-depth analysis of how they differ.
Unfortunately, some real estate agents confuse the public by advertising real estate listings. They will say things like, “come see the great value in this home which is listed under the assessed value.”
So what! Many homes are listed under the assessed value! Likewise, many are listed and sold over the assessed value. They have little correlation with one another.
When you are buying or selling a home, you should never look at the property’s assessed value as being its fair market value. Doing so would be a significant mistake.
What is fair market value in real estate?
Fair market value is what a buyer is willing to pay for a property and what a seller is willing to sell it for.
However, the assessed value is the value placed on a property by the government for tax purposes. The two values are often different, as the government may not know recent real estate market trends.
It becomes essential to understand this when selling or buying a property, as the fair market value may be lower or higher than the assessed value.
To determine the fair market value of a home, real estate agents will prepare a comparative market analysis or a broker price opinion. The market analysis will compare the subject property to similar houses sold nearby.
Real Estate agents will try to use properties with the most similar characteristics such as square footage, number of bedrooms and baths, location, condition, amenities and lot desirability.
They will generate a report detailing adjustments between the comparable properties. Once adjustments are made, a final determination of market value can be created.
What is appraised value in real estate?
A licensed real estate appraiser determines the appraised value of a home.
The appraised value of a home is determined by a licensed real estate appraiser and is based on many of the same factors a real estate agent would use, including the size, location, age, condition, and amenities of the property.
In theory, the appraised value of a home should be similar to the market value determined by a real estate agent. Sometimes they are, and sometimes they aren’t. Buyers and sellers need to understand that an appraisal and a market analysis are both value opinions.
Both appraisers and real estate agents can get this wrong. Sometimes consumers believe that what an appraiser states is gospel. It’s not. Appraisers are human, just like the rest of us. They make mistakes.
When buyers get a home loan, a real estate appraisal is required in most transactions. Mortgage lenders will require an appraisal unless there is significant equity in the property.
Lenders typically only waive an appraisal when there is more than twenty percent equity. Mortgage lenders will also require an appraisal when homeowners want to refinance their existing loan.
Final thoughts on types of real estate values
Understanding these three values are especially important when buying or selling a home. You never want to make crucial decisions based on things you shouldn’t.
The perfect example is trying to correlate the tax-assessed value with what a home is worth. Thinking that assessed value is the same as the market value would be similar to trusting an online value estimate. The odds of it not being the accurate value are high.
When buying or selling, speak to a trustworthy local real estate agent who understands pricing.
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell MetroWest Massachusetts real estate for the past 35 years. Bill is the owner and founder of Maximum Real Estate Exposure. For the past decade, he has been one of the top RE/MAX REALTORS® in New England.