What’s the Difference Between “Assessed Value” and “Fair Market Value”?

Property values play a key role in the world of real estate. Buyers are always looking to get a deal on a home, while sellers are always seeking the highest price.

But property values never stay put. They’re always changing depending on market conditions, and it’s up to buyers and sellers to understand where they happen to be in a particular market in order to either come up with the right listing or offer price, respectively.

When it comes to property value, buyers and sellers may come across the terms “assessed value” and “fair market value.” While both are used to determine the value of a home, their numbers are usually quite different.

So, what’s the difference between assessed versus fair market value, and how are they used differently to determine how much a property is worth?

Assessed Value

The purpose of an assessed value of a property is to provide local tax offices with information needed to calculate property taxes. Government offices send out assessors to gauge the value of properties in a given locale in order to appropriately determine how much homeowners will pay in annual property taxes.

Assessors do not go into great detail of a property like professional home appraisers do. Instead, government assessors will assign a specific value to homes in a certain location strictly for tax purposes based on educated guesses. Many times assessors base their value solely on the exterior of the home and the lot that it sits on without ever having gone inside the house.

Once the assessor determines a property value, that number is multiplied by the assessment rate for the particular jurisdiction that the home is located in. The property tax amount that the homeowner will be charged will then be arrived at.

Of course, there’s only so much that an assessor can do when valuing a property if up-to-date information on a home is not provided. Not only that, the timing of the market is usually never considered.

Typically, assessed property values are determined months before a property tax bill is sent out. In the meantime, the market could have changed, which affects property values. That’s why assessed property values are rarely ever considered in real estate transactions.

Buyers and sellers should know that the assessed value of a home is typically less than the appraised market value. Sometimes it’s considerably less than fair market value. Assessed property values are not used when pricing a home for sale or determining an appropriate offer price.

Fair Market Value

Unlike assessed value, fair market value takes the current time and conditions of the market into consideration when determining how much a property is worth. It’s not used for tax purposes, but to help real estate professionals establish an accurate price for both sellers and buyers. Sellers use market value to come up with a listing price that accurately reflects the current market, while buyers use this value when submitting an offer on a home.

The most accurate and widely used way to identify the fair market value of a home is by assessing what similar homes in the same area as the subject property have sold for in the recent past. Real estate agents and appraisers look at the same characteristics that assessors use to come up with a property value, such as size, condition, improvements, and so forth.

However, market value considers much more and goes into greater detail to establish a property’s value. It also takes into consideration the number of active buyers and sellers in the area, as well as the level of inventory.

Every interior and exterior characteristic is looked at in great detail, which is a far cry from what assessors typically do when establishing the assessed value of a property. Since fair market value uses much more detail and current market conditions to come up with a value, this number is considered to be much more accurate and in line with what a home is actually worth compared to assessed value.

Mortgage lenders also use market value when determining how much of a loan to extend to borrowers. They’ll send out their own appraisers in order to come up with this number.

Essentially, the fair market value of a home is the price that will most likely be paid by an able and willing buyer in a given market. That’s why it’s used in real estate transactions instead of assessed value.

The Bottom Line

If you’re wondering how the local tax office came up with your particular property taxes, then you’ll want to know what the assessed value of your home is. However, if you’re planning to buy or sell in the near future, it’s the fair market value that you should be looking at.

Not only does market value take far more characteristics of the structure, lot, and location into consideration, it also considers the current market conditions. What a home may be valued at today is certainly not the same as its value from a year ago. Given the pace at which real estate markets change, it’s important to consider these fluctuations when assessing the value of a home.