Understanding the Difference Between Market Value, Assessed Value and Appraised Value

Assessed Value, Appraised Value and Market Value

Who doesn’t want a good bang for her buck? Whether you’re out searching for your first home or you’re a seasoned real estate investor, at the end of the day, it always comes down to value. But, what is value? How do we measure it?

In real estate, a variety of metrics are used for different purposes to assign monetary worth to a piece of property. The most common metrics that you will come across are assessed value, appraised value and market value.

Market value will always be important throughout your ownership as it dictates the price at which you could sell if you ever needed to. Keep in mind that market value is about perception and many intangible factors influence buyer’s perceptions.

As a buyer, this can be confusing. How does this impact the list price and what the property is worth? Say a home is listed for $420,000. You put in an offer and get it under agreement at $400,000, thinking you are getting the deal of the century. Later on, the property only appraises for $397,000. Then, you check the tax record and learn that the house is assessed at just $300,000. What’s going on?

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Let’s break down what it all means.

Assessed Value

The assessed valuation determines property taxes. A tax assessor calculates it by comparing homes sales and inspections in the county. They may or may not have walked or been inside your property. The assessed value is on public record and should be easily accessible on the website of the local county recorder’s office. If the information is not online, you can track it down by calling or visiting the recorder’s office.

Why Should You Care?

Having an awareness of the assessed value is important to help you budget for property taxes and your monthly payments. Given that, it’s actually beneficial to have a low assessed value! However, do keep in mind, that assessed value is subject to change. Often times, the sale of a residence triggers a new assessment, meaning that after you purchase a home, the assessed value could adjust.

Appraised Value

The appraised value is an attempt to determine the property’s market value. An appraiser should have a close pulse on the real estate market in your area. By performing a thorough analysis (typically a room-by-room walk-through) of a home, the appraiser will then compare the condition, features and benefits of a property against others that have recently sold to provide an opinion on value.

Why Should You Care?

In a financed real estate transaction, prior to receiving your loan commitment, the lender will likely require a bank appraisal. The appraisal figure represents the max amount that the bank will loan against. If your appraisal comes in at your purchase price or higher, you are in the clear. However, if the appraisal comes in lower than the price you offered for a piece of real estate, you may have an issue. Check out what to do if your appraisal comes in low.

Market Value

Market value is simply the amount for which a home can be sold given the current market climate. The real estate market is dynamic and constantly changing. Socio-economic factors such as inventory, taxes and interest rates all impact the supply/demand equation as it relates to housing. The buyer pool determines the market value. The extent to which a house is perceived by a buyer to meet his or her needs or wants and willingness and ability to pay for it sets the market value.

Why Should You Care?

Unlike the two other metrics, which look at historical data and are measured by third-party observers, market value is driven by the consumer. Consumers have a lot of emotions dictating their decisions when purchasing a home. Market value is often driven by the buyer’s perception of the home’s worth or on intrinsic value. As a buyer, sometimes, you have to be in a certain neighborhood or you want a particular style of property. Homes are not commodities and buyers can justify a price tag because it offers some sort of inherent value to them that they can’t find elsewhere.

As a home buyer and owner, you will be impacted by all three measures of value:

  • Since the assessed value defines your property tax, you will be tied to this value throughout the course of your ownership. Because this figure changes over the course of time, you’ll want to keep tabs on your assessed value. If the number seems alarmingly high in comparison to similar properties in your area, you may be able to make a case to have it reassessed at a lower value.
  • An appraised value issued by the bank only crops up during the sale. However, as you build equity as a homeowner, you may decide to leverage your property through a refinance or by taking out a home equity line of credit. At that point a new bank appraisal would be ordered. Financing aside, at some point, you may hire an appraiser to provide an objective opinion on the value of your home. Homeowners sometimes decide to do this prior to listing a property to get a rough idea of what the market value may be.
  • The market value comes into play when you are out shopping and comparing list prices. Market value will always be important throughout your ownership as it dictates the price at which you could sell if you ever needed to. Keep in mind that market value is about perception and many intangible factors influence buyer’s perceptions. Algorithms have been created to estimate market value, but it really is more of an art than a science.

Let’s go back to our example in the beginning of the home listed for $420,000. Here’s what it all means:

    • A buyer willing to pay $400,000 for the house sets the market value.
    • The low appraised value of $397,000 is calculated by a third-party bank appraiser and could cause a snag in the financing.
    • An assessment at $300,000 determines the amount the homeowner will owe in property taxes. For the buyer, the lower the number the better.