Whether you're a homeowner looking to sell your home or are a prospective buyer hoping to get into the real estate market, there are certain key terms you should be familiar with, including "assessed value" and "market value". Basically, these terms refer to how much a home is worth.
Since they both involve the value of a home, how do assessed value and market value differ? Read on to find out what each term means and why it's important to differentiate between the two.
What Is Assessed Value vs. Market Value?
While both assessed value and market value involve determining how much a property is worth, they each serve different purposes.
The assessed value is used by local governments to determine how much homeowners are required to pay in property taxes. It's basically the value that property assessors establish before applying the municipality's assessment rate. Every city has its own tax rate, which typically changes every year and is based on the cost of paying for services in the community, such as policing, fire departments, road maintenance, and education, among others.
Municipal tax assessors will evaluate multiple factors when assessing the value of a home.
This may include:
- comparable properties in the area
- recent improvements
- the cost to replace the home if it is ever destroyed
- whether or not the homeowner is collecting rent
The assessed value of the home is then multiplied by the jurisdiction's tax rate. This results in the property tax amount that homeowners must pay every year. The higher the assessed value of a home, the more property taxes the homeowner must pay.
What Is Market Value?
Market value is used by real estate agents, lenders, sellers, and buyers to determine the value of a property for the purpose of estimating how much a home is worth based on current market conditions. Essentially, the market value represents a price that a qualified buyer would be willing to pay for a specific home today.
How Do Real Estate Agents Use Market Value?
Real estate agents typically use the comparative market analysis method to estimate the current value of a property, though there are other methods available. With the comparative market analysis tactic, agents compare similar homes in the vicinity of the subject property that have recently sold. They then use the sale prices of these properties to come up with a competitive listing price for the home they're selling. Buyer agents also use the market value of a home to determine a fair offer price.
How Do Lenders Use Market Value?
Lenders typically hire professional home appraisers to determine the market value for homes when homebuyers apply for a mortgage to finance the properties. That way, lenders are assured that they're not loaning out more than what the properties are worth.
What Is Fair Market Value vs. Market Value?
Fair market value refers to the highest price a home could sell for in an open housing market between a seller and buyer who have all the information needed to make an informed decision. Ultimately, it's the buyer or seller who determines the fair market value of a home.
Market value, on the other hand, is determined by the real estate agent or appraiser. It refers to the price a home should sell for based on current market conditions.
Information provided by Mortgage Maestro
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