When dealing with property transactions, whether buying, selling, or managing real estate, two important valuation concepts often come into play: market value and assessed value. Although they are both related to property valuation, they serve different purposes and are calculated differently. If you want to “value my property”, understanding the difference between market value and assessed value is crucial for property owners, buyers, and investors. Here’s a detailed explanation of these two concepts.
Market Value
Definition
What Is Market Value?
Market value is the estimated price at which a property would sell on the open market. It represents the amount a willing buyer would pay to a willing seller, both having reasonable knowledge of the property and acting without pressure. Market value reflects current market conditions and is influenced by the property’s features, location, and overall demand.
How It’s Determined
Comparable Sales: Market value is often determined by comparing the property to similar properties that have recently sold in the same area, known as “comparables” or “comps.” Adjustments are made based on differences between the properties, such as size, condition, and amenities.
Market Conditions: The state of the real estate market—whether it’s a buyer’s or seller’s market—significantly impacts market value. Economic factors such as interest rates, employment levels, and consumer confidence also play a role.
Property Features: Specific features of the property, including its size, layout, condition, and special amenities, affect its market value. Properties with unique or highly desirable features often command higher market values.
Purpose
Buying and Selling: Market value is most relevant when buying or selling a property, as it reflects the price that a buyer is likely to pay under current market conditions.
Financing: Lenders consider market value when determining the amount of money they’re willing to lend to a buyer, typically using an appraisal process to assess the property’s market value.
Assessed Value
Definition
What Is Assessed Value?
Assessed value is the value assigned to a property by a local government or tax authority for the purposes of calculating property taxes. It is typically a percentage of the property’s market value and is used solely to determine the amount of property tax the owner must pay.
How It’s Determined
Tax Assessment Process: The local tax assessor’s office conducts assessments on a regular basis (annually, biennially, etc.). The assessor may use a variety of methods, including comparing similar properties, evaluating the cost of replacing the property, or considering the income potential if it were rented.
Assessment Ratio: In many regions, the assessed value is a fraction of the market value, known as the assessment ratio. For example, if a property’s market value is £500,000 and the assessment ratio is 80%, the assessed value would be £400,000.
Adjustments and Exemptions: Certain exemptions, such as homestead exemptions for primary residences or discounts for senior citizens, can reduce the assessed value, thus lowering the tax burden.
Purpose
Property Taxes: The primary purpose of the assessed value is to calculate property taxes. The local tax rate is applied to the assessed value to determine how much property tax is owed.
Revenue for Local Governments: Property taxes based on assessed values provide a stable revenue stream for local governments, funding essential public services like schools, emergency services, and infrastructure.
Key Differences Between Market Value and Assessed Value
Usage and Purpose
Market Value: For buying, selling, financing, and insuring of property, it reflects the present worth of a property in the open market.
Assessed Value: For calculation of property taxes, it is determined by the local tax authorities and sometimes may or may not reflect current market conditions .
How Often Updated
Market Value: Fluctuates rather regularly based on the market, the requirements of buyers, and the actual changes in the property.
Assessed Value: Is updated according to a schedule that may be kept by the local government, say every year, once every other year, or perhaps over some other periodic cycle. Sometimes this may result in the assessed value being behind the times of the current market value.
Impact of Policies at the Level of Local Government
Market Value: It is determined by the fundamental forces of the real estate market, economic factors, and interaction of buyers and sellers. The factors of local government policy have less influence upon this kind of value, except for some particulars of zoning laws.
Assessed Value: Influenced by local government policies on assessment ratios, tax exemptions, and schedules of assessment.
Relation to Taxes
Market Value: It does not directly have an impact on property tax calculation but could indirectly affect taxes if reassessment changes the assessed value.
Assessed Value: It is the base on which property taxes are computed; thus, it directly impacts the amount of property tax that a home owner owes.
Why the Difference Matters
To Homeowners
Knowing Property Taxes Understand that the assessed value is the base of the taxation, not the market value, and if the market value increases a great deal, it has to translate into an increased assessment value some time in the near future and thus translate into increased property taxes.
Appealing Assessments: Many times, if the assessed value appears higher than the market value of a property, you can appeal to possibly lower your property taxes.
For Buyers
Budgeting for Taxes: When one purchases a home, the seller may negotiate based upon either the market value or the assessed value, or both. A potential home purchase may indicate that while the asking price will be low, the assessed value may be so high that this could increase property taxes over and above the expected amount.
Investment Decisions: Investors have to consider how the assessed value may fluctuate over time, especially if they intend to make improvements in the property. Such improvements may attract a reassessment with consequent increased taxes.
For Sellers
Pricing Strategy: When establishing an asking price, sellers will want to make sure that is based on the market value and not the assessed value, so as to attract buyers also looking at similar properties in that particular area.
Tax Consequences: Understanding the assessed value in relation to property taxes enables sellers to anticipate from prospective buyers questions on ongoing costs.
Conclusion
Both market and assessed values are essential terms related to the study of real estate. Each is to be used for a different purpose and is determined differently. Market value, being a product of the real estate market, reflects what one buying a certain property would pay for that property. Assessed value, on the other hand, is assigned by local tax authorities and is applied in the computation of property taxes. Understanding the difference will help homeowners, buyers, and investors in making intelligent decisions when owning, buying, and selling a property.
