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What's the Difference between Appraised Value vs. Assessed Value?

February 3, 2021 By: Great Midwest Bank

When preparing to sell or renovate your home, it’s essential to understand the current value of your property. Its worth now may be different than when you purchased the house. There are two ways to gauge your home’s value — appraised value and assessed value.

While they may sound similar, they are very different and this article is meant to help you understand the differences. It is not uncommon for the two values to be different from one another, and as a homeowner you should understand why. 

Why is Home Value Important?

Understanding your home’s value gives you more control over insurance premiums and property taxes. Refinancing, Home Equity Lines of Credit, insurance premiums, and annual property taxes are all based on your home’s value. For example, you can better evaluate if your property taxes are too high by pulling comps of similar homes. It’s worth the effort if you can lower your tax bill, right?

If you are waiting to put your home on the market, knowing your home’s market value is essential. It is also important if you are considering small renovations or a major remodeling project. Knowing the amount of equity you have built up in your home and if the home renovations you are planning will impact your home’s value enough to make your investment worthwhile can prevent you from making expensive mistakes. 

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Being able to accurately gauge the equity built up in your home can also offer peace of mind in a turbulent economy. Having access to a home equity line of credit or a home equity loan can offer financial flexibility and stability during times when your family needs to make a significant investment such as putting a kid through college, buying a new vehicle, or planning a family vacation. 

However, before making decisions based on your home’s value, it is essential to understand the difference between the appraised value and assessed value. 

What is an Assessed Value?

The assessed value of your home is what the local government uses to calculate property taxes. A tax assessment is required by state law to be performed at regular intervals that can often be years apart. These assessments help municipalities fairly levy annual taxes against real estate located in their jurisdiction. The purpose of a property assessment is, therefore, to provide a basis for collecting the taxes necessary to meet the municipalities’ annual budget, not to provide home buyers with prices they should pay for specific properties. 

To calculate property taxes, municipality officials will usually appoint an assessor or appraiser to determine your home’s value. It’s important to note that tax assessors may not be licensed appraisers. While rules will vary, the assessor compares your home to similar ones in the surrounding area. The appraiser may consider the following points when determining a property’s value:

  • Features and condition of the home
  • Curb appeal
  • Size and square footage
  • Surrounding properties
  • Access to public services

They often also do not see each individual property in an area they are assessing and rarely see every nook and cranny of the properties they are assessing. As such, they may not know about improvements made to properties since the last assessment or if a property is in dire need of fundamental repairs. The assessment process is often aided by computers and databases that contain property records and real estate data. It’s all to help provide a fair and accurate assessed value on your home. Much of the information they base their assessment on is taken from public record and may not necessarily be current or accurate for selling price purposes.  

In general, the assessed value of a home tends to be 20% to 40% lower than the fair market value. 

It’s no surprise, the higher the assessed value of your home, the more you’ll pay in property taxes so most homeowners don’t complain that their assessed value is too low. If they try to have their assessed value changed, it’s usually to lower it even more.

What is Appraised Value?

To determine the appraised value of your home, an appraisal is required. An appraisal consists of a thorough inspection of the property and a comparison of recently sold homes in the area to estimate the value.

At Great Midwest Bank, we require appraisers to be licensed in evaluating market data, approved by the bank’s Board of Directors, and provide a valuation that represents the “fair” sales price of the home if it were bought or sold today. The task of an appraiser is to determine a fair market value to your property. Appraisers look for certain things that can affect the price or impact the lender’s decision to loan you money for the home such as: 

  • Health and safety hazards
  • Structural integrity
  • Overall condition of the home
  • Upgrades or improvements
  • Visible defects

If there are signs of potential issues, an appraiser may request additional inspections such as a roof, pest, or water inspection. If the appraisal or inspection finds any conditions that don’t meet the lender’s requirements, they’ll have to be corrected before you can move in. The findings determine the amount a lender will let you borrow for the property. 

When buying a home, the appraised value protects you from paying more than the house is worth. When you’re refinancing your mortgage, it prevents the lender from giving the homeowner more money than the home is worth.

What is Fair Market Value?

Fair market value is what your house is expected to sell for. It’s important to understand that fair market value is different from a list price or appraised value. List price is the price a seller hopes to get for their home. It’s the price they advertise their property at when they put it up for sale. On the other hand, fair market value is an estimate on what buyers are willing to pay for a home. 

The market value is determined based on what the home is sold for before any financing is included in the process. This means if a home sold for $150k when it was listed for $200k, then the $150k becomes the market value.

So, which one is more important? 

Overall, the appraisal value will be the most accurate when it comes to lending decisions. However, appraised value will not be the price the home is always sold for. Fair market value is largely determined by the current housing inventory available in the local market. If inventory is very low, a house may sell easily at a listed price far above its assessed value. If inventory is plentiful, a seller may have to lower the listed price below the assessed value of the home in order to make a sale.

We understand that there still may be some confusion about the difference between appraised value, assessed value, and fair market price – especially if you are a first-time homebuyer. That’s okay. Our experienced loan officers are here to answer your questions and help guide through the loan process.

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Contact a Great Midwest Bank loan officer today. We’ll be happy to help you better understand the difference between appraised and assessed values and how they relate to the home buying process.