Real Estate Assessed Value vs Fair Market Value
Over the last twenty five years while working as a Massachusetts Realtor, one of the misconceptions that I routinely come across is people who like to draw a definitive correlation between a homes assessed value and it’s fair market value. Lets set the record straight folks – there is very little correlation in most circumstances between the two figures.
In fact some of the biggest perpetrators who misuse this information are Realtors themselves! Of course a Realtor who is going to discuss a homes fair market value in relation to it’s assessed value is only going to do so if it sheds a positive light on the property they are marketing.
Unfortunately the myth of assessed Real Estate values having a strong correlation to their present market value persists because of this.
Often times the general public gets confused about this because a number of Realtors fail to educate their clients that there is a big difference between the two figures. Looking at assessed values is about as good as using Zillow.com to figure out what a home is worth! If you have done any research on Zillow then you know how inaccurate their home values can be.
When the assessed value the town places on a home is higher than what a property is on the market for you will often see a Realtors advertisements that say something like this “Come see this bargain home that is priced $100,000 less than the assessed value”. What this immediately tells me is the Realtor either is not educated on property valuation or they believe there will be someone ignorant enough to think the home is the bargain of the century. Someone that knows better will be realizing the property has been over assessed by the town and the seller has been paying too much taxes!
The opposite of this scenario is home buyers who see a home listed higher than the assessed value and if they have not been informed properly by their buyers agent, will use this data point as part of their negotiations when submitting an offer. If more Realtors did a better job of teaching the public about the difference between market value and assessed value there would be far less confusion. In most cases assessed values are a worthless piece of data when figuring Real Estate values.
Here in Massachusetts most people realize Real Estate values have dropped in most area by a large percentage over the last five years. As values have dropped there were some folks that thought their taxes would come down along with them. When people misconstrue that assessed values and fair market values are the same they will generally arrive at this conclusion.
In theory this should be the case but assessed values are nothing more than a yard stick for a municipality to collect an appropriate amount of taxes to sufficiently cover the state and local appropriations chargeable to the city or town.
So what this means is the town is going to need to get “X” amount of money every year to run the show. If market values of homes are dropping assessments will eventually catch up to them but in the meantime towns will increase the tax rate as necessary to ensure they still get the funds necessary to cover their budget.
You also need to remember that the assessed value of a home often lags the market because the valuations are not re-calculated until the beginning of the next calender year. So if the market value of local properties are declining, it is not unusual to see the assessed value being higher. Likewise if values are heading up it could be just the opposite.
While practicing Real Estate I have seen some of the strangest things when it comes to assessed home values. Believe it or not I have seen some homes that are as much as a couple hundred thousand over or under assessed in comparison to their sales price.
I have seen two homes built by the same builder side by side where home “A” was larger and had a bigger lot than home “B” yet home “B” was charged more in taxes due to a higher assessed value. This should never happen but it does!
Home that have re-sold more recently will usually have a more accurate correlation of their market value vs assessed value than a home that has not sold in a long time. For example, a home that sold a couple years ago usually will have a stronger correlation than a home sold fifteen years ago.
Another example of how assessments can become slightly skewed is the home owner who feels they are being over assessed by the town, files a challenge, and wins an abatement. Their assessed value is now changed to the lower value. Does every other home owner who has a similar property get a notice in the mail saying their properties assessed value will also be coming down courtesy of the research done by Mr. Smith who lives down the street? If life were only that grand! This is the perfect example of the squeaky wheel getting the grease.
So what should you do if you think your assessed value is out of line with other similar homes in your neighborhood or town?
You could head to your local assessors office and file for a tax abatement! All the information necessary regarding the application process and the deadlines for filing should be made available to you at town hall.
Applications for tax abatement’s are due on or before the due date for payment of the first actual bill. The towns assessor has up to three months in Massachusetts to act upon an abatement request.
If you are denied your abatement request and do not feel that the assessor made the proper ruling you have the right to appeal to the State Appellate Tax Board.
In summary an assessed value is the valuation placed on a property by a public tax assessor for purposes of taxation. Fair Market Value on the other hand is the agreed upon price between a willing and informed buyer and seller under usual and ordinary circumstances. It is the highest price which the property will bring when exposed for sale on the open market to a buyer who is purchasing with full knowledge of the properties highest and best use.
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About the author: The above Real Estate information on Real Estate assessed value vs fair market value was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 25+ Years.
Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Blackstone, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northboro, Northbridge, Shrewsbury, Southboro, Sutton, Wayland, Westboro, Whitinsville, Worcester, Upton and Uxbridge MA.
About Bill Gassett
Bill this is excellent explanation of assessed value compared to the actual market value. Like you mention while looking at homes for sale, I have encountered Real Estate agents who will try to use an assessed value to their advantage in advertising. I am always puzzled by this. I guess my assumption is that if your are in the business you should know better!
Bill,
Thanks for posting this article! Very good reading and as I was reading I kept agreeing. I see so many agents here just look at the assessed value exclusively and price in accordance. I had a discussion with a first time homebuyer last week about this very thing and they appreciated the explanations I provided. Assessed valuations are quite confusing and often it seems there is little rhyme or reason to the valuations. Great reading!
Teresa Bakehorn
Teresa & Ken – thanks for your compliments on assessed value vs market value. Unfortunately there are a lot of agents that have not been properly trained and use this piece of data in both their evaluations and advertising.
Bill, Reading your editorial I felt as though we had co-authored it. I have been saying the same thing to my colleagues — for years!
When the assessed value is above the listing price the seller agents use it to their advantage (?) hammering on that point, BUT when it is lower than the listing price they tell you not to ‘fixate’ on it. I cannot change their minds but I can educate my buyer clients so they understand the difference between assessed value (and how the numbers are arrived at), appraised value (an art form, not a science) — when applicable, and market value.
It is the market that truly determines value. In my market, emotion has a great deal to do with a buyer’s decision and that can drive everyone nuts when trying to come up with CMA values. After all is said and done and all possible facts are known I simply tell my clients, “offer what it is worth to you”. A lot of education goes into my representation of buyers as I believe knowledge is power. I create Power Buyers. Thanks again for your reminder to all who will read your editorial.
Thanks for your comments Peter. It really does amaze me when agents start talking about assessed value to justify pricing of a home either higher or lower than it should be. It really makes me think the agent is ignorant when they try to use this useless statistic to strengthen their case.
This is a well written article. Thank you for sharing!
Thanks Elaine I appreciate the compliments. I find there are many that do not understand the difference between assessed value and market value.
Nice post Bill.
When you speak of Fair Market Value don’t forget to mention which definition of Market Value you are using. Most people use FIRREA’s, but there are others out there. FIRREA’s Definition is: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.
I also wanted make a point on property tax challenges. As you mentioned assessed values lag behind. What most people don’t understand is most towns in MA will base their 2012 assessed values on sales data from 2010. So if you are going to challenge your taxes, do not use recent sales. It is important to know the effective date the town uses in determining their assessed values.
Thanks John for your detailed comments on Real Estate value.
John, you are correct about the data used for assessments lagging behind which is just one reason assessments are inaccurate for the purposes of establishing ‘value’. Here on the Vineyard we are running about 18 months behind. Since we have been in a down market one would say basing current values on assessments would be a negative for an owner who is not selling and a plus for an owner who is selling. In an up market it would obviously work the other way. Assessments represent 100% of market value as required by Massachusetts General Laws but a home owner does not have to let the Assessor enter their home and a lot that could contribute to the market value can change behind the walls. Nevertheless, the argument still continues as agents will say it is some sort of measuring stick when you look at the overall percentage differential of sales verses assessed values.
Hi Bill, I have been on the listing side where buyers bring me low offers based on the assessed value. It seems as though agents need to really educate their clients as to the difference between market and assessed value. This is a great post and I wish every agent would read it and share with their clients. Keep up the great work.
Mr. LaBelle is correct in his assertion that current assessed value is based on 2010 values. As a 26 year Realtor and the Chairman of my local Board of Assessors, most Realtors are unaware of the assessing process and what it means to their clients. They should most certainly avail themselves to the information provided by their local Board of Assessors and make themselves available to assit their current and past clients in reviewing their assessments.
As an Assessor, when I see a well thought out arguement by a “competent” real estate profesional on an abatement application, it will show me the proper comps to make a knowledgable decision. Unfortunately, many times we see statements similar to “My real estate agent thinks I’m overassessed”
Great post and thank you for encouraging our fellow real estate professionals to become aware of the process to be of better service to their clients!
Richard thanks for dropping in and sharing your knowledge of assessed value vs fair market value.
Your analysis of assessed valuation vs market value applies in many states, but here in Los Angeles County the rules are very different. In the mid 1970s, the California real estate taxing district authorities, in its never ending demand to raise more money to expend on many useless and frivolus political programs, played the seesaw game of “this year we raise the rate, next year we raise the valuations” so that every year RE taxes increased and the governments obtained an unceasing and ever increasing supply of cash. Until Howard Jarvis came along and changed the whole game. In 1978 the citizens passed a ballot initiative called Proposition 13. This established a new way of realty taxation and effectively stopped the spendthrift politicans and bureaucrats in their tracks. They still can’t get over it. Bottom line: The assessed valuations actually equal the sales prices. If a homeowner still lived in the same house since 1978, his taxes in 2012 equals the tax he paid in 1978 plus a 1.5% cost of living adjustment. This simple procedure saved the homes and small businesses of many millions of taxpayers.
Ken – that is interesting. I did not know that California treated the tax issues/home assessments in this fashion.
Bill,
What you wrote is correct between the “assessed” value and the fair market value. What about the difference between the town/municipalities’ “assessed market” value and the fair market value?
Robin
Robin – when talking about assessed value we are talking about what a town assigns for a value. So it is the exact same thing.