How Does A Homes Assessed Value and Fair Market Value Differ?
If you think that real estate fair market value and real estate assessed value have any relation to one another, then you are mistaken!
As you read further in this article, you’re going to learn the difference between assessed and fair market real estate values.
Over the last five years, while working as a Florida Realtor, one misconception that buyers & sellers have is they draw a definitive correlation between a home's assessed value, and it’s fair market value.
So, let’s set the record straight – there is usually very little correlation between the two figures most of the time.
Some of the biggest perpetrators who might misuse this information are real estate agents themselves! However, a real estate agent who’s going to discuss a homes fair market value in relation to its assessed value will only do so if it sheds a positive light on the property they are going to be marketing.
Sadly, the myth of a homes assessed value having a strong correlation to its current market value persists because of this.
More often than not, the public gets confused about this because some real estate agents fail to educate their customers that there is a huge difference between an assessed value vs. fair market value. Looking at a home's assessed value is about as good as using a Zestimate to find out what the value of your homes is! If you’ve done any research on Zillow, then you know how inaccurate their home values can be, their homes' values they give you can be off up to as much as 20%.
When the real estate assessed value Sarasota County, Florida or Charlotte County, Florida assessor places on a home that is higher than what a property is listed on the market for you will many times see a real estate agents advertisements say something like this “Come see this bargain home that is priced $50,000 less than the assessed value”.
What this tells me straight away is that the real estate agent is either not properly educated on property valuation’s or they believe there will be someone dumb enough to think the home is the steal of the century. People who are properly educated will know better and will realize the property has been over-assessed by the county and the seller has been overpaying on their taxes!
On the flip side of this scenario are homebuyers who see a home listed higher than it's assessed value. If they haven’t been properly educated by their buyer’s agent, they will try to use this data when it comes to negotiations when submitting an offer.
An argument buyers make is that their offer is a particular dollar amount based off of what the assessed value happens to be.
If more real estate agents did a better job at educating their customers about the difference between a properties fair market value and assessed value, there would be a lot less confusion,and buyers wouldn’t be trying to correlate real estate assessed value to the fair market value.
Typically, assessed values are a useless piece of data when trying to figure out Real Estate values.
Here in Southwest Florida, most individuals realize Real Estate values can go up or down depending on the real estate market over a couple of years. As property values either increase or decrease, some people think their taxes would do the same.
In theory, one would think this is the case, however, assessed values are nothing more than a guide for a municipality to collect the appropriate amount of taxes to sufficiently cover the county or city appropriations chargeable by the city or town.
So what that means is the county or city you live in is going to need to get “X” amount of money every year to be able to run the county or city.
When market values of homes start dropping assessments will eventually catch up to them. However, the city or county will increase the tax rate as necessary to make sure they will still get the funds they need to cover their budget.
You also need to keep in mind that a properties assessed value usually lags behind the market value because the assessed valuations are not re-calculated until the beginning of the next calendar year.
So if the market values of properties are declining, usually you’ll see the assessed value being higher than the market value and vice versa, if you see market values increasing you’ll see the assessed value less than the market value.
While being in Real Estate, I have seen some of the weirdest things when it comes to a homes assessed value. Believe it or not, there have been times when you’ll see some homes that are tens of thousands of dollars over or under their assessed value in comparison to their sales price.
Homes that have re-sold more recently will usually have a more accurate correlation of their market value vs. assessed value than a house that has not sold in a long time, especially in Florida if the home has been homesteaded and is using Florida’s “Save our Homes Program”, where assessed home values can’t increase more than 3% year over year.
A good example is a home that sold a couple of years ago usually will have a stronger correlation than a house sold fifteen years ago and was homesteaded, and was under the “Save our Homes Program”.
Another example of how assessments can become skewed is when a homeowner thinks they are being over-assessed by the city or county, and files a challenge, and wins an abatement. Their assessed value will then be changed to the lower amount.
What is Fair Market Real Estate Value?
So how do real estate fair market value and assessed value differ from one another?
The fair market value of real estate is what a buyer is willing to pay for a property on the open market with no undue influence.
In real estate, there is a term called an “arms-length transaction” that is mentioned frequently. A good example of a “non-arms length transaction” would be there is a family member purchases a property at a discount to what it would have sold for otherwise.
Sometimes in real estate, if one family member is going to buy from another family member, they don’t always purchase the property at the full market value of that property. Under these circumstances, you wouldn’t be able to conclude that the property is worth the reduced sales price.
If however, the property was listed on the market and all real estate buyers had an equal shot to purchase the home, it would be concluded that when that home sells, the sale price would end up being the homes fair market value.
There are also some other examples in real estate when there are situations where properties are not sold for their fair market value.
A few of these situations are when someone is selling a home in divorce or when an owner gets transferred for work to another part of the country.
There are times when selling is constrained by timeframes, and a seller may want to discount the sales price to get the home sold quickly.
Then there’s distressed property or Bank-Owned properties which will usually sell under full fair market value. A distressed property can mean any number of things – examples can include an unusual amount of foreclosures homes close to the home, a property close to an airport and in the airport's flight path, the property is in a high-risk flood zone, or other similar types of issues that could cause homebuyers to look elsewhere for homes.
Being a homeowner, the only true way you can determine what real estate fair market value is by looking at what other similar properties have sold for in your area.
Usually, the sales must have occurred within the past six months to be considered a comparative sale. Anything over six months lenders and appraisers will not look at. The that should be compared are homes that should be of similar size, style, and characteristics.
Both a knowledgeable Realtor or an appraiser will be able to determine your home's real estate market value. Like anything else, evaluating the fair market value of real estate is a skill a knowledgeable Realtor should have.
Some real estate agents can be clueless when it comes to properly evaluating a property's fair market value!
Another additional thing to remember is that a property's appraised value is not necessarily the same thing as when a Realtor provides you a fair market value or comparative market analysis.
A home appraisal is conducted by a certified appraiser. An appraisal is done in a real estate transaction when the buyer is getting a mortgage to purchase the home. The lender requires an appraisal so they can make sure that they are lending money on a home that has a value equal to or higher than the purchase price.
An appraisal will also be done if a homeowner is looking to re-finance their home into a new mortgage. Theoretically, the fair market value and appraised value should be pretty similar. When an appraiser and Realtor determine fair market value, they’ll both use comparable home sales data to come to a definitive property value.
However, these two numbers are nothing more than opinions of value. But, they both, should be based on previous home sales data that a reasonable person would think is substantially similar.
How Can You Challenge An Assessed Real Estate Value?
Often a homeowner will buy a property for X number of dollars. Then after getting their tax bill, they feel that the assessed value is out of line vs. what the fair market value is. There’s no surprise this happens more often than not!
So what should you do if you think your assessed value is out of line with similar homes in your local neighborhood, or city?
You can head over to your local tax assessor’s office and file what is called a tax abatement! All the needed information regarding how the application process takes and any deadlines for filing should be made available to you at your local tax assessors office.
Applications for tax abatements are due on or before the due date for payment of your first tax bill.
Final Thoughts on Real Estate Assessed Value vs. Fair Market Value
Basically, a property's assessed value is a valuation placed on a property by the county tax assessor for the sole purpose of taxation. Fair Market Value of a property, on the other hand, is the agreed-upon purchase price between a willing buyer and seller under usual and ordinary circumstances in a real estate transaction. Fair Market Value is the highest price that the property will bring when listed and marketed for sale on the open market to a buyer who is purchasing with full knowledge of the property's highest and best use.
I hope, after reading this article, you have now figured out that a properties assessed value has nothing to do with it’s fair market value.
Other resources concerning real estate valuation worth a look:
- What is the definition of assessed value in real estate via Investopedia.
- One of the top home selling tips you will find regarding the sale of property is pricing it correctly!
- What is the fair market real estate value by Wikipedia.com.
Use the additional resources regarding real estate assessed value vs fair market value to not only educate yourself on these two distinct terms but to also price your home correctly when selling.
Thinking of Selling your home in Sarasota, Manatee or Charlotte County area of Florida? It is extremely important to make sure you price your home correctly. We’d love to prepare a complimentary comparative market analysis specifically designed and tailored for your home! In addition, we create a comprehensive marketing plan that is also designed specifically for each of our homes for sale, so contact The Larson Team today!
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