What’s the Difference Between Assessed Value and Market Value?
In contrast, the assessed value of a home doesn’t come into play during the sales process. Once you’re a homeowner, though, the assessed value of your property will be used to calculate your annual property tax bill.
Who Decides Each Type of Value?
The official fair market value of a home is determined by the buyer and seller. However, the process starts with a professional appraiser, who inspects the property and considers several factors, such as:
Lot size, square footage, style, curb appeal, and ageNumber of rooms, quality of maintenance, appliance condition, energy efficiency, and other systemsComparable properties in the area that have sold recentlyLocation of the property, including the surrounding neighborhood, school district, and other featuresSupply and demand in the local market
On the other hand, the local tax assessor is responsible for calculating the assessed value of properties in their municipality. While some aspects of the calculation can vary, they generally take the fair market value of a property and multiply it by the assessment ratio for where you live, then multiply that figure by the local “millage rate.” In property tax terms, a “mill” is one 1,000th of a dollar, equal to $1 of tax for each $1,000 of assessment.
Assessed Value vs. Market Value Example
Let’s say you’re planning to sell your home. You hire an appraiser who inspects the property and performs a comparative market analysis, giving you an estimated value of $330,000. You list the home at that price, but there are some issues with the home, such as a water heater that needs to be replaced and some water damage that must be fixed, and a buyer offers $320,000 instead. You agree to repair the water damage and offer to cover half the cost of a new water heater in exchange for a $325,000 sales price. If the buyer agrees, neither party feels pressured, and the market conditions are normal—favoring neither the buyer nor the seller—that’s the fair market value of the home. Now, the buyer will soon begin paying property taxes on their new home. If the assessment ratio in that municipality is 40%, multiply that by $325,000 to get an assessed value of $130,000. Then, let’s say the millage rate for the local municipality is $20 per $1,000 (or 2%). You’ll multiply that by the assessed value to get a property tax bill of $2,600 for the year.
What if You Disagree With Either?
As a homeowner, you can dispute a home appraisal if you believe it’s too low. You’ll start by requesting a copy of the appraisal. Look for errors and things the appraiser might have missed during the inspection. Make sure you point out upgrades and improvements you’ve made that they didn’t include in their report. The appraiser may adjust the estimate based on the information you’ve provided. If not, you could request a second appraisal from another appraiser. You can also dispute the assessed value of a property through an appeal. You’ll typically have a set period of time after you receive your property tax assessment to file your petition. You may choose to submit your appeal on your own or through an attorney. You’ll typically need to provide documentation for why you believe the property is overvalued. For example, you may enlist a real estate agent to help you run a comparative market analysis on the home and point out certain things that could cause the property to have a lower valuation.
The Bottom Line
The fair market value of a home is essentially its value when you sell it, so it’s important for both buyers and sellers to understand how it’s calculated. Work with a professional to get a good estimate so you know if the price is right. On the other hand, the assessed value of a property is used only for tax purposes. When you receive your assessment each year, review it and determine whether you agree with it.
