‘Assessed value’ and ‘market value’ can often seem confusing people, especially to those looking to sell their house. So, if you’re one of them, you must be thinking – what is assessed value? What’s market value? And what’s the difference between assessed value and market value?
The straight answer is – assessed value is basically used by local and county authorities for taxation purposes, while market value indicates the price of a property that a buyer is a likely to pay and the seller is likely to accept.
In order for local and county government authorities to have a foundation figure to charge property tax, they look at various factors to assess your home’s value. This figure that remains on the books of the Government is known as assessed value.
The market value, on the other hand, is an arbitrary value. It has no prior basis and can only be arrived at after the buyer and seller close the deal. Any value that both the buyer and the seller of the property agree on is the market value. In contrast to the assessed value, the market value is not used for taxation purposes. It is the price that you use to sell your home.
To value your house, you can take advantage of various online websites that provide you an estimated market value depending upon your location, lot size and other comparable properties. Realistically, it takes at least 3 months to sell your house when using a traditional listing agent. And if your property needs to have work done, then it can remain on the market for as long as a year.
In such situations, the best possible solution is to sell your house to a fast-cash or we-buy-house company who can inspect the house and agree on a contract on the spot without any need for loan approval or any other modifications or repairs to your home.
What is the assessed value?
Every county has their own set of regulations for marking taxes on real estate properties that you own. This kind of tax is generally known as property tax and is charged annually. In other words, it’s the property value for the purpose of calculating taxes. Each region has their process for calculating assessed value. However, despite the difference, the basic practices remain the same.
Generally, a county assessor is delegated to calculate the value for a specified tax district. The properties are valued on a yearly basis and the county assessor is responsible for making amendments to last year’s valuation depending on how the market has changed since then. The assessed value is calculated as a percentage of the fair market value of the property.
The assessment is based on real estate data. The assessors are required to visit the site and make assessments which would then help them arrived at a fair market value. The requirements for the site visit and parameters for the calculation vary from state to state.
This is one of the key differences in how assessed value and market value works. Despite being calculated as a percentage of the fair market value, the assessed value is calculated only once in a year. As a result, irrespective of the market changes during the 12 months prior to the next valuation, the assessed value remains the same.
Practically, this can cause a lot of problems for homeowners. For one, if the market value has fallen since the last valuation, the assessed value is going to be higher. As a result, despite a lower fair market value, the homeowner will still need to pay taxes on a higher valuation.
As a homeowner you have to right to dispute the assessed value on your property if you think it isn’t correct.
How is an assessed value calculated?
We’ve already covered that assessed value is calculated as a percentage of the market value. We won’t be elaborating on market value calculation in this section since will be looking at market value calculation in the sections below. So, we’ll take a simple example to run you through exactly how the value of real estate is assessed.
The assessment rate is one of the key components of assessed value calculation. The rate can vary anywhere from 10% to 100% depending on the state. For example, Mississippi has one of the lowest assessment rates of only 10% while Massachusetts has the highest assessment rate of 100%. Missouri, for example, has an assessment rate of 19%.
For the purpose of this example, we will assume Missouri’s rate. So, if your house has a market value of $100,000. Then the assessed value for the year would be $19,000.
How is property tax calculated?
Based on this value, the state will calculate your effective property tax by multiplying it with the property tax rate prevalent in your county and school district. The tax number will vary depending on school districts and health services. ($19,000 * 7.22% = $1,371 actual annual tax) For the exact number where you are living or purchasing just call the Collector of Revenue’s office and give them your address.
If we don’t know the exact rate, you can do a quick “ballpark” estimate by using the property tax rate which can vary from 0.27% to 2.40% depending on where you live. For the purpose of this calculation, we will assume that the rate prevalent in your state is 1%. In such case, the property tax payable would be $100,000 x 1% = $1,000. If you are in a more developed area you would bump the number up.
What is the market value?
Market value or fair market value is basically the sum that a prospective buyer and seller can mutually agree for a particular property. However, since the actual market value of a property cannot be identified without actually selling it, there are other methods used to estimate the market value of a property.
These methods are used by agents to help homeowners or prospective homeowners understand the value of a property. But an easier way is to get your house valued from real estate websites. It’s easy and convenient to use, there are no charges involved and you do not need to use an agent.
While the estimations will vary, they are made based on the market information available at the time. Neither is wrong or right since the ultimate market value is going to be the value at which the property is sold.
How is the market value derived?
As mentioned before, market value is the price that a buyer is willing to pay for a property and the seller is willing to accept. However, the real market value can only be known after the sale has been closed. As a result, an estimated market value is calculated based on numerous factors to help put the house on the market. Here are some of the factors that help decide the market value of the property:
- External appeal: The state of the house, size of the lot, architectural style and available space in front of the house, help determine the external appeal of the property.
- Interior: The number of rooms available in the property, condition of the plumbing, cooling and heating systems, appearance of the furniture and fittings, light conditions and energy efficiency, also play a central role in deciding the attractiveness of the house.
- Comparable property in the similar neighborhood: In order to get a benchmark for the house to be valued, a comparable property in the similar neighborhood, sold in the recent past is taken into consideration. Based on the market value of that comparable property, the current property will be valued.
- Demand and supply: Another key factor is the demand and supply for real estate in the area. If the location has low demand and a high supply, the market value will need to be lowered, while a low supply and high demand will help increase the price.
- Location of the property: A key factor that helps price any property is the location of the real estate, distance from hospitals, schools, city-center and other conveniences.
How does assessed and market value impact a homeowner?
The assessed value of a property is calculated based on the estimated market value and the existing market conditions. While the market value of the property fluctuates with market conditions, the assessed value remains constant for that particular year.
Homeowners need to remember that there’s no need to panic if the assessed value isn’t as high as they’d expected it to be. For one, it allows them to pay a lower amount of tax and secondly, it does not affect the price of the house on the market.
In conclusion, assessed value is basically used by Government authorities to calculate the tax for the property. As such it has no other bearing on the sale of your property. The market value is the price that your house actually sells for. That is why when selling a home; you should use the market value, since assessed value is only used for taxes. The main takeaway remains, that it’s important not to get carried away if there is a difference between the two. Ultimately, the property will sell for what it’s realistically worth and your best bet is in getting a good price, is choosing your timing and keeping your house well-maintained.
Rather than wait with your house on the market for at least 3-6 months, it’s easier and convenient to sell your house to a company like FasterHouse that can agree on a contract on the spot. There’s no hassle to get your house renovated and such.