Your Home’s Fair Market Value Doesn’t Jive With It’s Assessed Value — Here’s Why

Your property tax bill just showed up, but the assessed value of your home looks nothing like what your real estate agent thinks your home will sell for. Shouldn’t they be the same?

Not in top real estate agent Mario Greco’s experience. “Assessed value — at least in the 20 years I’ve been doing this — has absolutely no bearing on what a buyer will pay for your home,” he says. And Greco would know: his team has closed nearly $2 billion in sales.

Fair market value refers to the price a buyer and seller would agree upon if the home sold on the open market. This is an independent value estimate you’d receive from a licensed real estate appraiser or real estate agent.

Assessed value is slightly different. Assessors conduct “mass appraisals” to assign properties values for tax purposes. Since they evaluate property values for an entire area without stepping into individual homes, there isn’t as much flexibility to account for individual property factors like views, desirability of finishes, or corner lot location.

Fair market value is not influenced by assessed value — it’s totally dependent on what similar homes in the area are selling for. However, tax assessors may consider fair market values in a district when determining a property’s assessed value.

For more details, we spoke with Greco and Al Dams, Chief Deputy Assessor for King County, Washington. Dive in for a comprehensive comparison of assessed value and fair market value.

A couple trying to determine the fair market value of their home.
Source: (Surface / Unsplash)

The two values have different purposes

Assessed value and fair market value serve different end goals. A licensed appraiser or real estate agent usually determines a property’s fair market value if an owner wants to sell or refinance their home. On the other hand, the local assessor establishes an assessed value to base property taxes on.

Fair market value

If you’re selling your home, your real estate agent determines your home’s fair market value to pin a strategic listing price. Ideally, sellers should list their homes close to market value to encourage strong offers from buyers.

If you price your home too far below market value, you’ll leave money on the table. And if you list too high above market value, you’ll miss out on offers from market-savvy buyers who know your home is overpriced. Overpriced homes often sit on the market for longer, which can lead to price cuts or low-ball offers.

If you refinance your home, your lender will determine the property’s fair market value to assess how much available equity you have in your home compared to its current value. Loan underwriters calculate maximum loan amounts using a loan-to-value ratio (LTV). The value portion of the equation refers to your fair market value.

Assessed value

Your local government (e.g., county or town) uses your home’s assessed value to calculate your property taxes. As we’ll explain below, tax assessors conduct “mass appraisals” to determine the assessed value of homes in a tax district.

“Our values are used to distribute the tax burden,” explains Dams, adding that “uniformity is our biggest goal.”

Assessed values ensure each person pays their fair share of property taxes to keep local services — such as road maintenance, fire departments, libraries, and schools — running.

Different experts determine these valuations

To determine a fair market value, the homeowner or mortgage lender hires a licensed appraiser or real estate agent to evaluate the property. For an assessed value, your local municipality employs and trains property assessors to conduct valuations for tax purposes.

Fair market value

Your real estate agent estimates your home’s fair market value by preparing a competitive market analysis (CMA).

Another way to determine your fair market value is through a licensed home appraiser. Whether you’re selling or refinancing, your or your buyer’s mortgage lender will hire an appraiser for an unbiased opinion.

The appraisal protects the mortgage lender’s interests. A lender won’t approve a $350,000 loan amount on a $400,000 purchase when the fair market value is only $300,000, for example.

Assessed value

Unlike an independent residential appraiser, your property tax assessor is either an elected or appointed government official. The assessor may lead an in-house staff — including clerks, deputy assessors, and field appraisers — to carry out valuations within its jurisdiction. Unlike a residential property appraiser who conducts individual property valuations, property tax assessors execute bulk appraisals for many properties at once.

The curb appeal of your home can affect its fair market value.
Source: (Victoria Lea / Unsplash)

Process for determining value

Although appraisers, real estate agents, and tax assessors may use similar data points to determine fair market value and assessed, their overall evaluation methods differ.

Fair market value

For most residential homes, real estate agents and appraisers calculate fair market value by comparing recent sale prices of similar properties. The agent or appraiser looks at public records, multiple listing service (MLS) records, and third-party data to research how much homes similar to yours sold for recently.

They’ll compare your property’s characteristics such as the number of bedrooms, square footage, and subjective attributes like curb appeal and desirability of finishes stack up to these comparable properties, or “comps.” The agent or appraiser then adjusts your home’s fair market value based on the differences.

Comparative market analysis

When a real estate agent uses the sales approach to determine fair market value, the process is called a Comparative Market Analysis (CMA). In a CMA, an agent compares your home to about 10 similar properties that sold recently. The agent then uses the CMA findings to inform a competitive listing price; this listing price is typically close to the determined Fair Market Value, though pricing strategies may vary.

Appraisal

An appraiser applies the sales approach when conducting an appraisal. Your property may undergo an appraisal in several circumstances:

During an appraisal, the appraiser inspects and photographs the interior and exterior of your home. In certain cases, an appraiser may not step into your home if a buyer’s lender or a cash buyer only requires a drive-by appraisal. The appraiser weighs the similarities and differences against at least three other comparable homes. The comparables must be recent — no more than 12 months, according to Fannie Mae guidelines.

Other methods

If there’s a lack of comparable sales (e.g., a home in a newly built community) or if the property generates rental income, an appraiser or agent will use the following evaluation methods instead:

  • Cost approach: When sales comparable data is scarce, the cost approach weighs heavily on the actual replacement value of the home. What would it cost to rebuild? The appraiser would then factor in the value of the land and the structure’s depreciation to estimate a market value.
  • Income approach: The income approach is used for income-producing properties and multi-units, not owner-occupied single-family homes. When using the income approach, the appraiser factors in a property’s cash flow, such as rental income, along with expenses. Using these data points, the appraiser derives a property value by analyzing income potential and yield of return.

Assessed value

Dams reveals that property assessors rely on public records, such as deeds and building permits, from the local recorder’s office. Assessors also take into account the physical characteristics of a home to compare it with nearby properties.

But unlike an independent appraiser, your local assessor may not conduct a visual inspection for every valuation. Your county procedures may be different, but in King County, for instance, field appraisers check on a property’s exterior once every six years to look for changes that don’t match the current data, such as room additions.

Assessors also use older sales data than an appraiser would use. Dams notes that in King County, where assessments happen annually, assessors base values on local sales from the prior two years. Sometimes they use data from up to five years if they’re evaluating a unique property.

Assessments also lag behind fair market values because of the tax collection process. Dams explains that when a January 1 valuation occurs, the homeowner doesn’t receive the reassessment notification until the following January.

“By the time someone sees their value change notice, our values are a year or more old. When the first tax bill is due on April 30, the values will be 16 months old,” he says. Dams adds that “assessors tend to be conservative when they trend to not overshoot the market.”

In Cook County, assessors use an algorithm that pulls sales data from the past five years to identify market trends. Like King County, Cook County incorporates market trends to estimate a market value. But Cook County doesn’t use their estimated value as the final assessed value. Instead, local ordinance dictates that assessors use 10% of market value as the assessed value.

Certain areas also impose limitations on assessed value increases, which can widen the gap between fair market values and assessed values. For example, California’s Proposition 13 limits value increases to 2% unless the home is sold or newly constructed. That means a home with an assessed value of $500,000 in one year won’t exceed $510,000 the following year — no matter if the home’s market value jumps to $700,000.

A laptop where an agent might assess the fair market value of your home.
Source: (MayoFi / Unsplash)

Time of valuation

Assessed valuations happen at fixed time frames based on your local government’s regulations. Unlike property assessments, you can obtain an updated fair market value at any time. Because of fluctuating market conditions and different valuation dates, a property’s fair market and assessed value can differ widely.

Fair market value

As a homeowner, you can schedule a fair market valuation at any time, even if you’re simply curious about what your home is worth. You’ll most likely request a fair market valuation when you’re thinking about selling or refinancing your mortgage. You could also use an appraisal to remove private mortgage insurance (PMI) or if you’re going through a legal proceeding that requires the valuation of assets, such as divorce.

Assessed value

Your local municipality dictates when assessments happen in your area. For instance, in Cook County, Greco’s area, assessments take place every three years. In contrast, Dams says that King County’s residential property assessments happen annually. Visual field inspections take place once every six years, he adds.

In some areas, a title transfer, such as the sale of a home, can trigger a value reassessment. If you sold your home at fair market value and your municipality reassessed your home using the sales price, your fair market value and assessed value could be nearly the same — at least for the time being. A home sale in California, for example, triggers a reassessment due to Proposition 13. The local county reassesses the home at its fair market value, or the recorded sales price, effective on the date of the title transfer.

Two men disagreeing on the fair market value of a home.
Source: (Sebastian Herrmann / Unsplash)

Process for challenging

You can challenge the appraiser or tax assessor if you disagree with their valuation of your home. In both cases, you’ll need to present new data and documentation to support your claim.

Fair market value

You’re probably challenging your appraisal if you think the appraiser’s report undervalued your home since a low appraisal can jeopardize the sale.

Your buyer’s lender won’t approve a loan for more than the property’s appraised value. To close the sale, the buyer would need to make up the difference between the sales price and value with a larger down payment. Or you’d have to lower your sales price to meet the appraised value.

If you’re refinancing, a low value affects how much you can borrow against your home. If you’re trying to pull equity out of your home with a cash-out refinance, you won’t be able to pull out as much equity if the appraisal comes in low.

If you think the appraiser made errors or didn’t use the best comparables, you can file a Reconsideration of Value (ROV). When you’re selling or refinancing, you’ll send the request to the mortgage lender that hired the appraiser, not the appraiser directly.

Property Sciences, a nationwide appraisal management firm, advises homeowners to present a fact-based case for appraisal reconsideration by submitting the following:

  • Corrections to data errors listed on the report: For example, if the appraiser lists three bedrooms on your appraisal report, but your home has four bedrooms, the error could affect the value in your favor.
  • Updates or new data for neighborhood sales: Did your neighbor’s home with the same floor plan just sell 15% higher than the appraiser’s comparables? You can request that the appraiser revisit the comparable sales if you think the updated sales help bump the value.

Assessed value

Unlike fair market value appraisals, homeowners usually challenge an assessed value to assert a lower value. A lower value means a reduced property tax bill.

If you disagree with your property’s assessed value, you’ll need to call or visit your local assessor’s office for appeal instructions and deadlines. Like the ROV, you must provide supporting data and documentation to contest your tax assessor’s valuation.

For example, in King County, you’d need to provide evidence as to why the assessor’s value is incorrect. Dams shares that evidence should include data discrepancies, such as the wrong number of bathrooms or recent sales comparables that support your value. You have 60 days from the mailing date of the property value notice, the notice of your new assessed value, to file your appeal.

Cook County also offers an online appeal form, but deadlines vary depending on your township. The county publishes an annual calendar and list of deadlines for appeal.

Don’t panic if the two values don’t match up

Can your home’s assessed value and fair market value be the same? Yes. Is it likely? No. In most cases, your home’s assessed value will lag behind its current fair market value. And that’s okay.

If you’re thinking about selling, don’t worry about the assessed value affecting your resale value. According to Greco, one doesn’t dictate the other.

“If you are one of those rare people … whose assessed value is somehow higher than what a buyer would pay you, it doesn’t matter,” he says. “The market is going to tell you whether or not that’s correct.”

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