How Do Assessed Value and Market Value Differ?
Do you know the difference between assessed value vs. market value?
If you think assessed value and market value have any correlation with one another, then you are wrong!
You will discover the difference between assessed and fair market real estate values as you read further.
Over the last thirty-six 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 home’s assessed value and its market value.
Let’s set the record straight – there is very little correlation between the two figures in most circumstances.
In fact, some of the biggest perpetrators who misuse this information are Realtors themselves!
Of course, a Realtor who will discuss a home’s market value to its assessed value will only 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.
The general public often gets confused about this because some Realtors fail to educate their clients that there is a big difference between an assessed value and market value.
Looking at assessed values is about as good as using Zillow.com to figure out what a home is worth! If you have researched Zillow, you know how inaccurate home values on Zillow can be.
Real Estate Agents Are Often To Blame for Assessed Value vs. Market Value Misconceptions
When the real estate assessed value the town places on a home is higher than what a property is on the market for, you will often see a Realtor’s advertisements that say something like this “Come to see this bargain home that is priced $100,000 less than the assessed value”.
This immediately tells me that the Realtor either is not educated on property valuation or believes there will be someone ignorant enough to think the home is the bargain of the century. Someone that knows better will realize the property has been over-assessed by the town, and the seller has been paying too much in taxes!
The opposite of this scenario is homebuyers who see a home listed higher than the assessed value. If their buyer’s agent has not appropriately informed them, they will use this data point as part of their negotiations when submitting an offer.
A buyer argues that their offer is a particular dollar value because of the assessed value.
If more Realtors did a better job of teaching the public about the difference between fair market value and assessed value, there would be far less confusion. Potential buyers would never try to correlate market value vs. assessed value.
In most cases, assessed values are a worthless piece of data when figuring Real Estate values.
What is Assessed Value?
What does assessed value mean? Great question, right? Many people will ask a real estate agent the assessed value definition.
Most people realize Real Estate values can go up or down depending on the market over a period of years. As values either rise or fall, some folks think their taxes would go up or down along with them. When people misconstrue that assessed values and 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 yardstick 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 municipality.
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 required to cover their budget.
Local government will use the property tax rate or mill rate by which assessed values are multiplied to determine your property tax bill.
It can also be called the assessment rate. So the assessed value of your home is used for nothing more than tax purposes.
How Does an Assessor Figure Out Assessed Values
You’re probably wondering how the government assessor comes up with the tax-assessed value.
There are several things an assessor will do to arrive at assessed property values, including:
- Comparable home sales – assessors will try to use recent sales in the area with similar characteristics to arrive at an appropriate assessed value. These are known as comps.
- Improvements are taken into consideration. One of the reasons tax assessors ask to visit homes is so they can verify what improvements are made. Often these home inspections are triggered when a homeowner pulls a building permit. For example, a significant addition or kitchen remodel could influence the assessed value.
- Rebuilding costs and land values will be taken into consideration. Lot size can be a significant variable with assessment value.
A property tax assessment is conducted using mass appraisal techniques with the help of automated computer programs. This is because assessors often have many properties to consider.
The assessor may use the computerized assessment as a starting point but may adjust the determined assessed value based on the specifics of the home in question.
An assessor determining the assessed value of a single-family home with four bedrooms and 2.5 baths would compare it to other homes with similar characteristics. However, if there were substantial modifications made with high-end upgrades, it could impact the assessed value.
The location, square footage, number of bedrooms and baths, and lot size are all significant factors in taxable value.
Property Assessed Value Lags Behind Market Value
You also need to remember that the assessed value of a home often lags behind the market because the valuations are not re-calculated until the beginning of the following calendar year.
So if the market value of local properties is declining, it is not unusual to see the assessed value being higher. Likewise, if values are heading up, it could be just the opposite.
The assessed value of property rarely, if ever, is the same as market value.
While practicing Real Estate, I have seen some of the strangest things regarding 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 compared to their market price.
I have seen two new construction homes built by the same builder side by side where home “A” had more square footage and had a more considerable 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!
Assessed Property Value is More Accurate When It’s Recent
Homes that have re-sold more recently will usually have a more accurate correlation of their market value vs. assessed value than a house that has not sold in a long time.
For example, a home sold a couple of years ago will usually have a stronger correlation than a house sold fifteen years ago. Cities and towns see the market adjustments more clearly and move the assessed value appropriately.
However, it is essential to note that some cities and towns update their property assessments at various times. In some states, they may be updated yearly; in others, they may be five years or something in between.
Market values, on the other hand, are constantly in flux. Another good reason why there is little correlation between assessed value vs. market value.
Challenging Assessed Value of Property
Another example of how assessments can become slightly skewed is the homeowner who feels they are over-assessed by the town, files a challenge, and wins an abatement. Their assessed value is now changed to a lower amount.
Lowering your real estate tax bill is possible when you challenge and win a high property tax assessment.
Does every other homeowner with a similar property get a notice in the mail saying their property’s assessed value will also come 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.
What is Fair Market Real Estate Value?
So how do assessed value and market value differ?
The fair market value of real estate is what a buyer would be willing to pay for a property on the open market with no undue influence.
In real estate, the term “arms-length transaction” is often mentioned. An example of a non-arms length transaction is when a family member buys a property at a discount to what it would be sold for otherwise.
Often in real estate, if one family member buys from another, they don’t always purchase at the total value of the property. Under these circumstances, you could not conclude that the property is worth the reduced sales price.
If, however, the property was put on the market and all real estate buyers had an equal opportunity to purchase the home, it would be concluded that whatever the sale price ends up being is the fair market value.
There are some additional examples in real estate when there are extenuating circumstances where properties are not sold for the fair market value.
A few of these circumstances are when someone is selling a home in a divorce, or an owner gets transferred to another part of the country.
Sometimes selling becomes constrained by time, and an owner may discount the sale price to get the home sold quickly.
Distressed Properties Often Sell Under Market Value
A distressed property will usually not sell for total fair market value either. A distressed property could mean many things – some examples include an unusual amount of foreclosures close to the home, a toxic waste dump nearby, the property being in a flood zone, or other similar types of issues that could cause buyers to look elsewhere for homes.
As a homeowner, you determine real estate fair market value by looking at what other similar properties have sold in your area.
Typically the sales must have occurred in the last six months to be considered a comparative sale. Anything longer than six months lenders and appraisers will not look at. The homes should be of similar size, style, and characteristics.
Either a competent Realtor or an appraiser can determine your home’s real estate value. Keep in mind the word competent. Like anything else, evaluating the fair market value of real estate is a skill.
Appraised Value vs. Assessed Value
The appraised value of a home is not the same thing as the assessed value, much like the market value. Appraised values and market values should have much more in common with one another.
A professional certified appraiser conducts a home appraisal. This is done in a real estate transaction where the buyer gets a mortgage. Mortgage lenders want to ensure that they are lending money on a property with a home value equal to or higher than the purchase price.
An appraiser will also be asked to provide property market values when homeowners are looking to refinance into a new mortgage. Theoretically, the fair market value and appraised value should be relatively similar.
When appraisers and real estate agents determine market value, they use comparable sales data to arrive at a definitive property value.
In essence, these two figures are nothing more than opinions of value. They should, however, be based on previous sales data that a reasonable person would conclude is substantially similar.
So, just like market value, appraised values are rarely similar to assessed values.
How to Find Property-Assessed Value
There are a few ways to find the assessed value of a property. You can visit the town hall and the tax assessor’s office. They will have the assessed property value of every home in the community. Ask the clerk for the specific property address, and they can provide you with the assessed value.
If you speak to a local real estate agent, they will also be able to give you the assessed value of a home you’re curious about. Real Estate agents have access to the Multiple Listing Service, which provides assessed value data for every home.
Of course, an owner’s property tax bill will also show the assessment.
How to Challenge An Assessed Home Value
Sometimes a homeowner will purchase a property for X number of dollars. Later after getting their tax bill, they feel the assessed value is way out of line vs. the market value. No surprise there, as it happens all the time!
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 assessor’s 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 the town hall.
Applications for tax abatements are due on or before the due date for payment of the first actual bill. The town’s assessor has up to three months in Massachusetts to approve 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.
The assessment appeals board will either rule in favor or against your request. It is usually helpful to get legal advice from a real estate attorney.
Conclusions on Market Value vs. Assessed Value
In summary, the assessed value is a valuation placed on a property by a public tax assessor for taxation purposes.
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 the property will bring when exposed for sale on the open market to a buyer who is purchasing with full knowledge of the property’s highest and best use.
Hopefully, after reading this, you have figured out that tax-assessed value has nothing to do with a property’s market value.
About the author: The above Real Estate information on assessed value vs. market value was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at firstname.lastname@example.org or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 36+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.