As a buyer or seller, you will likely hear two "prices" thrown about: assessed value versus market value. So what's the difference?
While assessed value and market value may seem similar, these numbers can be different—typically assessed value is lower—and they're used in distinct ways as well. So let's clear up any confusion so you can wield these terms to your advantage.
What is the market value? Market value is the price that a buyer is willing to pay for a home, and that a seller is willing to accept.
Real estate agents are trained to pinpoint a home's market value, which is done by looking at a variety of characteristics, including the following:
- External characteristics: Curb appeal, exterior condition of the home, lot size, home style, availability of public utilities.
- Internal characteristics: Size and number of rooms, construction and appliance quality and condition, heating systems, and energy efficiency.
- Comps, or comparables: What similar homes in the same area have sold for recently.
- Supply and demand: The number of buyers and the number of sellers in your area.
- Location: How desirable is the neighborhood? Are the schools good? Is the crime rate low?
A home's market value often is a good starting point for all kinds of things. For one, listing agents use market value to help sellers come up with a fair asking price for their home. And, since buyers shouldn't just trust what sellers say their place is worth, their own agent can also estimate the home's market value and come up with a different price than they think their clients should offer. No number is right or wrong; the ultimate deciding force is what price a buyer and seller are willing to shake hands on to close the deal.
What is the assessed value? When trying to understand the assessed valued of a property, you must know who is doing the assessing and why the property is being assessed.
Municipalities, mostly counties, employ an assessor to place a value on a home in order to levy property taxes on it. To arrive at a value, the assessor (similar to a real estate agent) looks at what similar properties are selling for, the value of any recent improvements, any income you may be making from, say, renting out a room in the property, and other factors—like the replacement cost of the property if, God forbid, it burns down in a fire (which sounds dark, but assessors are thorough professionals who consider every possibility).
In the end, the assessor comes up with the value of your home. Then, he multiplies that number by an “assessment rate,” a uniform percentage that each tax jurisdiction sets that is typically 80% to 90%. So if, say, the market value of your home is $200,000 and your local assessment rate is 80%, then the assessed value of your home is $160,000.
That $160,000 is then used by your local government to calculate your property taxes. The higher your home's assessed value, the more you'll pay in taxes.
In Texas, homeowners can claim homestead tax exemption for their primary residence, which further reduces the assessed value by as much as 20%. Using the same example above, $160,000 assessed value will be further be reduced by 20% which is $32,000. The resulting assessed value is $128,000. $128,000 is then used by your local government to calculate the property taxes.
What assessed and market values mean to you. While a home's market value can rise and fall precipitously based on local conditions, assessed values are typically more immune to fluctuations.
But the bottom line is, don't get bent out of shape if you hear your assessed value isn't as high as you'd hoped. The assessed value is used mostly for property tax purposes. Homebuyers and sellers, on the other hand, look more to market value instead.
However, the assessed value can come up when you buy or sell a home because this number, unlike the loosey-goosey market value, is public knowledge contained in property records. So, rising assessed values bode well when home sellers try to justify their sales price to a buyer: “Hey, the assessed value is $310,000, and I’m only asking $320,000.” Likewise, buyers can use assessed value to justify a lower price: "Hey, the assessed value is $260,000, and you're asking for $300,000. What gives?"
But the thing to remember with both assessed and market value is that at the end of the day, the price of a home is all in the eye of the beholder. The only number that matters is what a buyer and seller can agree sounds right, so don't take any number you see too seriously.