The difference between the assessed vs. appraised value of your home is more about who is doing the estimating and less about the actual value of your home. The assessed value is what your taxing entity (typically your local government) believes the property is worth. That number is used to determine how much property tax you owe. The appraised value is what an independent appraiser believes the property is worth. The appraised value (vs. the assessed value) more closely aligns with the market value of the home. An appraisal is usually done when you’re in the process of buying, selling, or taking out a loan against a property.
As far as it concerns you and your money, a mistake in either of these values could have you unfairly paying more for your home. But don’t worry — we have you covered. We’ll examine the differences between assessed vs. appraised value and how each will affect your finances.
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Defining Assessed Value and Appraised Value
Let’s have a closer look at the definition of assessed value vs. appraised value:
Assessed value. The assessed value of your property is the value determined by your local taxing authority. The assessed value is used to determine how much you’ll pay in taxes. It is typically updated once a year.
Appraised value. The appraised value is an independent evaluation of a property’s fair market value based on the sales price of comparable properties recently on the market, as well as on the home itself. If you need to borrow money for a home loan, an appraisal will be required by the lender. It’s ordered by the lender and paid for by the buyer. Appraisals are used by lenders to determine:
• How much the home is worth
• What interest rate the lender can give you
• What down payment may be required
• Whether or not you’ll be approved for the loan
At a glance, the major differences between assessed and appraised value can be summarized as follows:
|
Assessed Value |
Appraised Value |
|
|
What is it? |
The value of your home subject to taxes |
The market value of your home |
|
Purpose? |
To determine how much property tax you owe |
To meet lender requirements for a mortgage loan or home equity line of credit (HELOC) |
|
How is the value determined? |
By a tax assessor |
By an appraiser |
|
Who pays? |
Local government |
Buyer |
|
How does it affect your money? |
You could pay more or less tax based on how your property is assessed |
Low appraisals could mean more money out of pocket to cover an appraisal gap, a higher interest rate when a higher loan-to-value ratio is calculated, or even denial of the loan |
How Assessed Value Is Determined
Tax assessors determine the assessed value based on records of the value of your home when it last changed hands. They also look at a property’s size, location, age, condition, features, and comparable properties to come up with this number. Once the assessor determines the home’s value, any exemptions (discounts for one reason or another) are applied to your taxes from there. The assessed value is used to calculate property taxes each year.
For example, the state of Utah allows counties to exempt 45% of the home’s market value and tax on the remaining 55% for properties that serve as primary residences. A home with a $500,000 market value would be taxed at 55% of the value, or $275,000.
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The Role of Local Tax Assessors
Property taxes are the main source of revenue for many government services, such as schools, police, and fire departments. The amount of property tax owed is determined by local tax assessors, who can use mass appraisal techniques for property evaluations of entire neighborhoods. Tax notices are typically sent out yearly with the changes in value and resulting change in tax owed.
Note: Taxation can be complex and different for each local area. A common misconception is that taxes increase when your home value increases, which isn’t always the case. Taxing entities set the rates and may not be able to change the taxation rate unless it falls inside the bounds of tax laws. Moreover, if you have made significant improvements on your home since you purchased it, the assessed value may not reflect those changes. Sometimes local governments send property owners surveys to try to capture that information, asking them to disclose, say, new HVAC systems or newly finished basements.
Assessment Ratios and Frequency
The tricky part with taxes is homeowners typically don’t pay tax on the full market value of the home. They only pay taxes on the assessed value, which is a percentage of the market value. The percentage that you pay is called the assessment ratio — the percentage of your property value that is taxed. Assessments are typically updated yearly to reflect changing market values.
The Appraisal Process, Explained
The appraisal process is different from the assessment process and is often seen during a home purchase or sale. It looks something like this:
1. Get preapproved by a mortgage lender. You want to get preapproved so you’re pretty sure of the loan amount you could qualify for. You want to know your numbers in case you get thrown a curve ball with the appraisal, which affects how much the lender is willing to loan to you.
2. Start shopping for a home in your budget — and one that you feel is worth what the seller is asking. One of the top questions when you’re shopping for a home should be, “Will this home appraise for the amount the seller is asking?” A low appraisal could mean the lender won’t approve the loan for the full amount you’ve requested and you may have to make up the difference out of pocket in order to purchase the home.
3. Find a home and make an offer. The offer will typically include the contract with financing terms. This is important when it comes to the appraised value because if the contract allows for a financing contingency, then you may be able to exit the contract with your earnest money intact if the home appraises for significantly less than you agreed to pay.
4. Send the real estate purchase contract over to the lender. If the seller accepts your terms and signs the contract, you’ll send over the contract to your lender. They’ll start processing the loan, which includes ordering an appraisal.
5. The appraiser will assess the property. Most appraisals ordered by the lender usually require an in-person inspection of the property, but it’s also possible that a desktop appraisal may be acceptable. A home appraisal waiver may also be possible.
6. Go through underwriting and close the loan. The loan will continue to move through underwriting and to the closing table if everything, including the valuation from the appraisal, meets the lender’s underwriting criteria.
Factors Influencing Appraised Value
While the appraisal itself is an opinion of the price of the home, there are some key factors that influence it. Some of the things that hurt home appraisals (or help them) include:
• Market conditions. What are other homes in the area selling for? How does your home compare with others in the area?
• Size. Does the home have more square footage, garage space, or extra storage space?
• Location. Is the property in a desirable area? Are there nearby features, such as a golf course, that make the home more valuable? Is it in a well-regarded school district?
• Age. How old is the property and how has it been maintained?
• Property condition. Are the structural components updated or in good condition? Has the property been recently renovated?
• Landscaping and curb appeal. Is the site well kept and appealing?
• Number of bedrooms and bathrooms. The number of bedrooms and bathrooms plays a large factor in the appraised value of the home.
• Heating and air conditioning. How is the home heated and cooled? Are the systems efficient? Outdated?
An appraisal is different from a home inspection, which you may also have when purchasing a property, and the appraiser and inspector will be looking at slightly different things.
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Impact on Property Taxes and Home Purchases
Appraisals vs. assessments affect property values differently. Assessments will determine how much tax you’re charged. Appraisals affect how much money the lender is willing to loan you on a home purchase.
But they aren’t the last word on what a home is worth. One issue that can arise in a high-demand, low-inventory housing market is appraisals not coming in high enough for the loan — the so-called appraisal gap. Housing prices can rise faster than comparable sales data reflects. As noted above, when an appraisal is low, you may need to make up the difference with your own personal funds. Renegotiating with the seller or finding another property are other options in this situation.
The Takeaway
The key thing to remember with assessed value vs. appraised value is to keep your eye on the purpose of the valuation. What will the numbers be used for? A lower assessed value translates into lower taxes. A lower appraised value can affect how large a mortgage a lender will approve and, thus, a buyer’s ability to purchase a home.
If you’re concerned about the value of a property, either because you’re making a purchase or because you are considering a home loan or a refinance, talk to a lender. The lender will be able to walk you through your options and answer any questions you have about the appraised value vs. assessed value of the home and how it affects your money.
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FAQ
How often is a property’s assessed value updated?
Assessed property values are typically updated yearly.
How do improvements affect assessed and appraised values?
Each year, you’ll see an updated number from your tax assessor, which is usually adjusted based on fluctuating market conditions. Tax assessors can adjust the number based on any known improvements, but they’re not required to take a close look at your property every year. In many states, physical inspections only happen every five years, so you may not see an immediate increase in taxes unless you report improvements.
Are assessed values public information?
Assessed values are considered public information. When a property changes ownership, the information is recorded with your county. Information you could see in these records includes the name and address of the owner, a description of the property, the value of the property, land and improvements, how taxes are distributed to the different taxing units, how much tax is paid and the date tax is paid.
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