FYI - Previous Posts [Three and Four]

Part Three: ASSESSED VALUE, FAIR MARKET VALUE, APPRAISED VALUE, AND ASKING PRICE 


As a home buyer, you may find a single home that carries three different prices, for instance:

• The assessed value of a particular house might be $250,000

• The appraised value might be $270,000

• The list price might be higher than both, at $280,000


While this may be confusing to home buyers, it doesn’t have to be once you understand the differences and similarities between assessed value, appraised value, fair market value, and the asking price.


Assessed Property Value

We start with what is usually the lower end of the spectrum, which is the assessed property value. The most important thing to understand is that the assessed value is not the same as the appraised value, which is a common misconception among first-time buyers.


Property assessments and home appraisals are two totally different things. The assessed value comes from the local tax assessor's office, which may exist at the town, city, or county level of government. Because taxation is the sole purpose of the assessed value, the assessor assigns a value to each property within his or her jurisdiction. This number is used to determine the property tax assigned to a particular home. These taxes can be used to cover the cost of schools, police and fire services, infrastructure, and other local government expenses.


As a home buyer, you need to know the following:

• The assessed value is usually lower than the fair market value  

  of a house.

• Sometimes it's a lot lower, and because of this, you should not  

  base your offer on the assessed property value of a house.

• While the assessed value can help you determine what you 

  might end up paying in property taxes each year, it's not very  

  useful when it comes to making an offer on a home, or when 

  negotiating the price with a seller.

• You're better off using the fair market value of the home for 

  these purposes.


Fair Market Value

The fair market value (FMV) is the fair price for a particular home based on current market conditions. It is based on the forces of supply and demand, not the opinion of a city or county tax official. It is a term commonly used in tax and real estate, and has come to represent the price of an asset under the following usual set of conditions:

• Prospective buyers and sellers are reasonably knowledgeable 

  about the asset

• They are behaving in their own best interests

• They are free of undue pressure to trade

• They are given a reasonable time period for completing the 

  transaction


When priced at or near FMV, a property will sell in a reasonable amount of time. When priced well above FMV, the same property will take longer to sell. To determine the fair market value of a house, you should see what similar homes have sold for recently, within the same area where the "target" house is located.


Appraised Value

The appraised value of a house is the result of a home appraisal, which is conducted by a licensed appraiser, whose goal is to “estimate the true market value of a property, so that the lender can make an informed decision when providing a loan.”

In some ways, the appraised value is similar to the fair market value. The difference is that the appraisal is one person's opinion, whereas the fair market value can be determined by anyone who evaluates local real estate conditions. Both real estate agents and home appraisers use recently sold comparable homes (or "comps") to determine the current value of a particular property. They also make price adjustments to account for differences between the subject home and the comps.


When comps are used to determine the appraised value, this is called the "market approach". But, there is also the "cost approach", which is sometimes used by home appraisers. The bottom line here is that home buyers should not pay more for a house than it would cost to rebuild or even build a similar home. In most cases however, it is the market approach that has the biggest influence on the final appraisal number.


Asking Price

We now come to the seller’s asking price, which is also referred to as the list or listing price. The term list price is preferable because using the term “asking price” is often misinterpreted as the price the seller doesn’t expect to get. However it is defined, it is important to remember that the “asking price” is the price at which the home is listed for sale. It is typically the seller who comes up with this number, usually with input from a real estate listing agent. The seller could also have a professional home appraisal done, to help identify the current market value of the property. The seller could decide to simply use the comparable sales figures.


As a Home Buyer:

• You should be most concerned with the fair market value of a 

  home and that's what you should base your offer on.

• You should know that the appraised value can also be useful to 

  you, but it should be considered alongside the current market 

  value.

• You should know that the assessed property value can help 

  you determine your property taxes, but it's not useful during 

  the offer and negotiating stage.

• You should know that the seller's list or asking price is simply a 

  number attached to the house; it may or may not reflect 

  current real estate conditions.


More to come on the Appraisal Process

Part Four: [Title to Come]