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Assessment, Appraisal and Market Value Explained
By Joe Gladden, USN, (Retired), Realtor
As published in military.com
Frequently, sellers and buyers, and even their Realtors, confuse the terms “Assessment,” “Appraisal,” and the actual “Market Value” of a home. For instance, a buyer considering a home that is listed for $300,000 will research the public tax records and note that the “tax assessment” is only $250,000 and concludes that this must be the “market value” of the home. The buyer then constructs his / her offer accordingly only to be disappointed when the offer is rejected.
The converse can happen in a declining market when the seller believes a high “assessment” should somehow dictate a higher list price than the market will actually bear, only to be disappointed when they receive no offers for their home. Or that the independent “appraisal” they had done last year when they refinanced their home is considerably higher or lower than the list price suggested by their Realtor.
These definitions should help:
“Market Value”- “the price a home will command from a rational purchaser under normal conditions.” It is basic supply and demand economics. As home inventory on the market (supply) increases, home prices will fall if the demand is constant or declining. If home inventories are stable and demand is increasing, ie. due to lower interest rates or a booming “local” economy, home prices will rise.
“Assessment”– “the tax assessment is a number used by the local government (usually the county or parish) to establish the home owner’s property tax liability. The “assessed value” is multiplied by the “tax levy rate” to determine the annual property tax bill to the homeowner. Since the tax rate or levy is usually determined by the voters, the easiest means for the local government to adjust the amount of aggregate taxes collected to pay for schools, roads, etc., is through the annual “assessment.” In most areas this is done by a very impersonal formula.
While “assessments” generally “follow” the market trend, in reality they have little or no correlation to the actual “market value.” The fact is, the “assessor” NEVER sees the home, has no idea of the condition of the home, and does not know the list price or final sales price for the other 10 homes on the market in the same neighborhood. Nor can the assessor know whether you have construction grade appliances in the kitchen, or top-of-the line gourmet appliances.
Assessors will also adjust the “assessed” value based on “permitted work” only. Here are examples of how misleading the “assessed value” can be. In January a home owner begins a major home improvement project such as a pool or finishing the basement. The contractor pulls the permits and completes a $50,000 improvement. The work is completed and inspected in March but the assessed value may not change until the next assessment in December. Or a home owner completes a $20,000 kitchen and $10,000 bathroom renovation that does not require permits. These very substantial improvements would never be picked up in the assessment, but almost certainly increase the market value. And of course if a home is very outdated and / or in disrepair, this will not be reflected in the assessment.
A final comment on assessments – they almost never take into consideration surrounding factors such as the “power line” that cuts across the property or the “spectacular view of the mountains” and other such factors that most certainly impact the market value. Assessments have little value when making decisions on market value.
“Appraised Value” - “an approximate market value established by an independent, trained and certified professional after an on site evaluation of the property and condition. The appraiser will compare the home to recently sold homes with similar characteristics, and homes presently on the market in the same locality.
An appraisal can be an excellent snapshot estimate of where the market value is at any given point in time but it is limited by a few factors. First, appraisals are generally ordered by the purchaser’s lender and paid for by the purchaser only after a contract is written. The lender requires this to ensure they are not loaning money on an overvalued property. Some savvy sellers will invest in a certified appraisal before they put the home on the market to substantiate their list price. Secondly, the appraiser frequently will not have access to the comparison homes and makes the comparison based on written listing information only. Since most contracts are written “contingent” on the home appraising at or above the sales prices, the “appraisal” is a good sanity check for both buyer and sellers and should approximate market value despite these limitations.
Comparative Market Analysis (CMA) - Most experienced Realtors can and should provide a preliminary CMA to determine an appropriate list price for a seller, or to determine an appropriate offer price for a buyer. Typically Realtors have access to the same listing information as appraisers but can also tour other local homes on the market to compare condition and other factors with the existing competition. They should also have access to analytical tools such as spreadsheets and statistics generated from their local Multiple Listing Service that can be invaluable to zeroing in on Market Value. In many cases, experienced Realtors can be as accurate (or more so) than appraisers. However, to be effective, Realtors MUST be willing to “tell it like it is” even at the risk of delivering news that the client doesn’t want to here!
It is important to remember that the supply and demand, and thus the Market Value, will always be a local phenomena. While the demand will certainly be influenced by national circumstances such as interest rates, the local economy will generally be the key factor in both the demand for, and supply of homes. It is also important to note what Market Value is not. It is NOT the amount you paid for your home, how much you OWE on your home, the great price your NEIGHBOR received for their home, or the ASSESSED value, or even the APPRAISED value. It can change over night when the interest rates change or when five more homes in your area come on the market at higher or lower prices. Taking the emotion out of your decisions and being objective give both the home seller and purchaser a tremendous advantage in the process!
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copyright 2008 reproduced with permission of military.com