Many terms could confuse you when entering the home-buying process. But these are essential steps that need to be completed that you should understand.
Assessed value vs. market value is one of the confusing phrases that you need to understand when buying a home.
The general public often thinks that assessed values correlate to what a house is worth. Unfortunately, this thinking can lead to mistakes.
Let’s look at property assessments and how they determine the assessed value. With this information in hand, you'll understand better why looking at assessed value should solely be used to know what you'll pay in property taxes.
How is the Fair Market Value of a Home Found?
Real estate agents will use comparable properties and a home's square footage to estimate the value. Appraisals are also used to find a more accurate estimate of how much the home is worth.
A real estate agent will calculate the value of a property by using comparative market analysis. Licensed appraisers hired by a lending institution will provide a real estate appraisal.
It should be made clear that broker price opinions and appraisals differ from one another.
Despite these methods of finding the market value, the amount the home is actually worth will ultimately depend on how much someone is willing to pay.
Why the Assessed Home Value is Important
The assessed value is different from the market value. The assessed home value is used to calculate property taxes.
The assessed value gives you an insight into the property taxes that will be due when you own the home. Before making an offer on a home, these need to be considered so you won’t overstretch your finances.
Property taxes vary significantly across the country depending on your location. Property taxes could be considerably higher in your buying area vs. another nearby.
While this might not be a deciding factor most of the time, it is good to know before you purchase the home.
How is the Assessed Value Determined?
The assessor will consider a few different factors when assessing value. This will include:
- Comparables. They will use the sold prices of other similar properties in the area.
- Improvements. If you have completed improvements recently, this could increase the value.
- Rebuilding. The cost of rebuilding the property will be considered.
Most of the time, however, this assessment will be automated using the software as their starting point to find the value. They can adjust the assessed value due to specific details about the home. If the home has been recently renovated, it should be assessed higher than comparable homes.
Are Home Appraisals the Same as an Assessment?
Appraisals and assessments are not the same. A property assessment is only to find the amount of tax payable on the home.
When you buy a home, the lender will not accept a tax assessment and will still hire an appraiser. The lender wants to ensure that the home is worth what the buyer has agreed to pay for it and requires a traditional appraisal.
Are the Assessed Value and the Market Value Linked?
An assessor might use market value information to help get a more accurate assessment. Sometimes, Realtors might use the assessed value when marketing the home to buyers. However, doing this is dumb because there is no correlation between assessed and market value, so it just confuses the public.
If the home has undergone some upgrades, this will be reflected in the appraisal. This change should also increase the assessed value if the appraisal information is used.
How Often are Assessments Required?
State or local laws will set the assessment requirements. This might mean a yearly reassessment, or it could be only every 5 years, depending on the local rules. Another reason assessed value and market value can be so disjointed.
If the assessment seems too high, a shorter time between assessments will help reduce the property taxes faster. But it goes the other way as well, and when home values rise, taxes will increase sooner with a short reassessment gap.
How do You Find Out a Property's Assessed Value?
Finding out a home's assessed value is straightforward. You can either visit the local city hall, head into the tax collector's office or ask a local real estate agent to provide it.
Real Estate agents have access to the multiple listing service, which provides assessed value through local database portals.
Can Assessed Values be Disputed?
If the assessed home value seems higher than it should be, you can ask to have it reassessed. Disputing this with your tax collector’s office might help you reduce your taxes sooner than waiting for the following assessment.
Market Value is More Important to Buyers
While the assessed tax value shows how much you will need to pay each year, it isn’t going to be as important as the market value. Reassessments will happen every so often and change the property taxes, which are less important than the fair market value.
While the tax rate might be high now, it could change the next time the home is assessed. However, the home's value will affect the amount you pay monthly to your lender. Higher valuations mean you will pay more interest on your mortgage and are a far more critical concern when buying a home.
Concluding Thoughts
Assuming a property's assessed value is what you should pay for a home is a significant mistake. Never assume the assessed home value has anything to do with fair market value.
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