Assessed Value vs. Market Value

When evaluating real estate, it's important to know the difference between assessed value and market value. Assessed value determines property taxes, while market value is the price a property would sell for. This distinction is important for real estate investors who are interested in refinancing a mortgage as it can affect their investment decisions.

If you want to build a real estate portfolio, a financial advisor can help you analyze and manage investments.

What Is Assessed Value?

The assessed value of a home is a valuation determined by a local government, typically by a tax assessor, for property tax calculations . It's based on factors like the property’s size, location and the overall condition.

How Is Assessed Value Calculated?

The assessor considers elements like square footage, the number of bedrooms and bathrooms, any upgrades or improvements made and the overall state of the property. It may also take into account recent sales data from similar properties in the area to arrive at an accurate assessment.

How Often Is a Home's Value Reassessed?

Some municipalities conduct reassessments annually, while others might do them every few years. Because it directly influences the amount of property tax a homeowner is required to pay, the local government will apply a specific tax rate, often referred to as a mill rate, to the assessed value to determine the annual property tax bill.

When Do Assessed Values Matter?

Property taxes collected based on assessed values fund essential public services like schools, road maintenance and emergency response. Understanding the assessed value of a home is key for homeowners who are planning long-term finances because they have the right to appeal the assessment, potentially leading to a lower tax bill.

What Is Market Value?

The market value of a home is the estimated amount a property would sell for in the current real estate market, so it's influenced by what buyers are willing to pay and what sellers are willing to accept. Real estate professionals, such as appraisers or real estate advisors , will review the home's location, size, condition and any unique features before analyzing recent sales of comparable properties in the same area to determine market value.

What Determines Market Value?

Market value can fluctuate based on market conditions, economic factors and local demand. For example, in a seller’s market where demand exceeds supply, the market value of homes may increase, reflecting buyers’ willingness to pay more. Conversely, in a buyer’s market, where there are more homes for sale than buyers, market value might decrease as sellers compete to attract buyers.

Why Is Market Value Important?

Market value serves as a benchmark in real estate transactions, guiding negotiations and helping all parties involved make informed decisions. For sellers, it helps set a realistic asking price to attract potential buyers while maximizing returns. For buyers, knowing the market value ensures they pay a fair price based on current market conditions. Lenders also use it in their calculations to refinance a mortgage .

Key Differences Between Assessed Value and Market Value

• Purpose : The assessed value is primarily used by local governments to calculate property taxes. In contrast, market value represents the price a home could reasonably fetch on the open market.
• Determination process : Assessed value is determined by a tax assessor who may use formulas or models specific to the local jurisdiction. Market value is determined by real estate professionals using recent sales of comparable properties.
• Influence of external factors : Assessed value is relatively stable, adjusted only at intervals based on municipal guidelines or re-assessment cycles. Market value is more volatile because it is directly influenced by the real estate market, economic conditions and buyer sentiment.
• Impact on financial decisions : Assessed value mainly impacts the amount of property tax owed, while market value influences buying, selling and refinancing mortgage rates . Market value can also play a role in determining a home’s insurance needs and potential investment return.

How Do They Affect Each Other?

While assessed value and market value are different, they can influence each other indirectly. For example, if a neighborhood experiences significant appreciation in home prices, local tax assessors might reevaluate properties to align assessed values more closely with current market conditions.

Assessed value, on the other hand, doesn't impact the market value of a home since negotiations are based on current market conditions rather than tax assessments. However, potential buyers might consider the property taxes part of  the total cost of ownership, especially in high-tax areas.

Bottom Line

These values play significant roles in property taxation and real estate transactions. Understanding how assessed and market values impact the real estate landscape can provide homeowners with a clearer perspective on property-related financial decisions. Consulting a financial advisor could help homeowners learn more about how these values can have a broader effect on their portfolio's performance.

Tips for Real Estate Investments

• A financial advisor can help you create a real estate investment plan based on your needs and goals. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• If you want to know how much your portfolio will be worth at a specific date in the future, SmartAsset's investment return and growth calculator can help you get an estimate .

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