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Whether you’re a new homeowner or first-time home buyer, you may have heard the terms “assessed value” and “appraised value” thrown around by your loan officer or real estate agent.
Despite sounding similar, the two names serve very different purposes when it comes to home value. This can lead to significant differences in how the price of the same home is determined. We’ll review what each of these terms mean and why they’re important to understand as a home buyer and homeowner.
What To Know About Assessed Value vs. Appraised Value
These two values have distinct differences. A home appraisal is used to determine market value, while an assessment is used to calculate yearly property taxes. It’s important to remember that these values are not interchangeable and typically won’t be the same.
You’ll likely notice that your house’s assessed value will be lower than the appraised or fair market value – that’s completely normal and will not impact anything except property taxes.
What Is Appraised Value?
Appraised value represents the objective value of your home and is established by a licensed expert. This value is critical for helping lenders determine the loan-to-value ratio when approving a mortgage.
For instance, if the property you want to buy comes in $30,000 below the amount you offered for it, a bank will not loan you the full amount. You’ll then have to cover the difference yourself out of pocket. It’s best not to pay more than the house was appraised for – starting out with negative equity isn’t exactly a sound financial decision!
Also, be aware that just because a house appraises for a certain amount doesn’t mean that will be the price it’s sold for. There are other factors, like how motivated the seller is or market conditions, that can impact the final sale price. In a seller’s market, it’s not uncommon for buyers to pay cash above what the loan is approved for to make a competitive offer.
If a house appraises for higher than the asking price, the seller may ask for more money or threaten to back out of the deal if you can’t increase your offer. Appraisal gaps can be challenging and stressful. So make sure to work closely with your real estate agent to avoid any unnecessary headaches.
Compared to appraised value, fair market value is the price your home would sell for on the open market. Sometimes these numbers are the same, but – as mentioned in the example above – these numbers can be different. One of the best ways to evaluate fair market value is to find comparable homes (“comps”) in your area.
How appraisers evaluate your property
When it’s time to evaluate the property, the lender will order an appraisal through a third-party company. This ensures the service provider is unbiased and will provide accurate results.
The state-licensed appraiser will then perform an inspection of the exterior and interior of the home, ensuring everything is in good structural shape and there’s no major damage. They’ll assess a number of factors, such as:
- Total square footage (not including basements)
- Overall condition
- Major structural improvements, additions or renovations
- Number of bedrooms
- Architectural style
- The HVAC system
- Curb appeal
- Basement condition
- Built-in appliance upgrades
When it comes to appraisals, government-backed loans have different rules than conventional loans. For example, the home appraiser will need to test utilities and appliances for FHA loans during the evaluation.
Once the property has been inspected properly, comps in the neighborhood or zip code will be assessed to ensure the value aligns with real estate market trends. Both of these steps are used to calculate a final appraised value.
What Is Assessed Value?
The assessed value of a home has a single purpose: to calculate property taxes for a given year. These assessments are done periodically. Depending on the jurisdiction, they may be performed as often as every year or as little as every five years.
How assessments work
Local governments have professional assessors to determine your property’s tax-assessed value. Besides visiting the home (they generally only look at the exterior), the assessor will also review specific information and data, like:
- Historical property data
- Home inspection findings
- Appraised value
- Home improvements
- Other relevant public data
To calculate your property taxes, the home’s assessed value is multiplied by the municipality’s mill rate – a figure specific to the municipality in determining property tax amounts.
Can You Dispute an Assessment or an Appraisal?
If you face an assessed or appraised value that doesn’t seem accurate, you have the right to file a dispute.
Disputing an assessment
Most assessment disputes happen when a homeowner feels the assessed value of their home is too high, since this means an unfair tax bill. To request a reduction in your assessed value, a representative from the local tax assessor’s office will visit your home to conduct a more in-depth survey.
Older appliances, HVAC equipment, flooring and other outdated features may be taken into consideration if they were missed on the original assessment.
If you’re successful in your appeal but already paid your property taxes for the year, you’ll receive a rebate. Make sure you review your county’s policies for filing an appeal. Some jurisdictions may require the request to be filed within 30 days or less of receiving your new property assessment.
Disputing an appraisal
A majority of appraisal disputes happen when the appraisal number comes in lower than the offer that was made on a home. In this case, you can request a second appraisal at your own expense.
The seller is not required to approve another appraisal and is free to consider other offers on the table. There’s also no guarantee the additional appraisal will come back in your favor. So many times, it’s best to move on to another property.
In rare cases, appraised value can be lower than market value. In hot seller’s markets (where supply is low and demand is high), many buyers are willing to pay over the appraised value to get a home.
Though it’s rare, it’s definitely possible for the appraised value of a home to come back higher than market value. This can happen if buyers are few and far between when a seller lists their home.
Know Your Worth
The key takeaway is that appraised value is used by lenders to ensure they’re not lending you too much based on the property’s worth. Assessed value is only used for property tax purposes.