Why Knowing Assessed Value vs Market Value Matters
One of the elements that immediately capture the attention of buyers in housing offers, in addition to appearance, is the price of the property and knowing assessed value vs. market value. However, how do you know how much your house is worth? That is a question that very few homeowners can answer objectively, but not from firsthand knowledge.
It does matter that the homeowner knows both the assessed value and the market value. Most realtors and appraisers would be able to answer that question after a thorough examination and knowledge of the area.
Market Value
The market value is determined by the law of supply and demand. This value is indicative of the price of the home. It is necessary, to determine this, that certain conditions are met such as that there is a buyer with economic capacity, that buyer and seller act freely, and that there is a free (open) market. The housing market value fluctuates since it depends on circumstances such as:
- Inflation
- The economic situation
- The more or less abundant supply in the market
It is also subjective since the decision on the purchase and sale price is not usually the result of a study of objective data.
Real estate and appraisal professionals know the value of each square meter according to its geographic location. However, you have to take into account other expenses, in addition to the location and the square meters such as:
- The year of construction
- The state (whether or not it needs reform, for example)
- If there is any type of repairs to be done
Other factors (for example, if it is attached to a train track is not the same as if it is in the middle of a park).
Assessed Value
The assessed value matters because it is used in the calculation of property taxes. The assessed value indicates how much the homeowner will pay for property taxes every year. Prior to making an offer on the property, the homeowner has to consider the yearly property taxes as part of the budget. The assessed value gives the homebuyer enough information to know whether they can afford the yearly property taxes or not. It is very important to know what you are getting yourself into prior to buying the home.
The States With the Highest Effective Property Tax Rates
| State | Effective Tax Rate |
|---|---|
| New Jersey | 2.21% |
| Illinois | 2.05% |
| New Hampshire | 2.03% |
| Vermont | 1.80% |
| Wisconsin | 1.73% |
Determining the Value
To offer the public that property that you want to sell or rent, you will need an appraisal that determines its price and knows assessed value vs market value. The appraisal will assess the actual value of the property and the homes in the area will have a lot to do with the market value of the property. One of the ways that realtors come up with the price of the property is by looking at the market value after the assessed value has been determined.
Through the appraisal, three types of house price values are obtained:
- Physical Value: calculation of construction materials and facilities
- Commercial Value: take into account the area and the properties surrounding the property
- Income Value: establishes the estimated amount to pay for rent or purchase of the property
These types of values are obtained through three approaches that in sum provide the total value of the property. Likewise, a hypothetical calculation is carried out on how much it would cost to build a property similar to the one being evaluated, the unit costs of the entire construction are considered and its physical devaluation and its conservation are deducted. The data is then broken down into a table to check the value.
is spent on property taxes by the average American household every year.
Comparative Market Approach
The value of the property is considered according to the market offered through the following criteria:
Comparables for sale: similar properties in the same or similar areas
Criteria that add value:
Type of area: tourist, commercial, residential, social interest, popular, etc.
Location within the block: apple tree, dead-end, corner, bottom, and others
Roads: adjoining access roads
Quality of public services
Topography: physical characteristics of the soil
Area: the relationship between the production and sale of real estate in the area
Negotiation: adjust the sale price to market demand
Construction quality: quality of structure and materials (takes into account the comparison properties)
Type of construction: residential, medium, or social interest compared to the properties in the area
Project quality: functionality, aesthetics, and comfort of the property to be valued and the comparison properties
Location within the community
Parking spaces
Location within the building: in the case of being an apartment
About the Process
The process involves knowing assessed value vs market value of operations and analyzing supply and demand. Information is collected from real estate comparable to the one being assessed. By arriving at a comparable indicator, an approximate purchase price can be established.
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Capitalization Approach
Both the assessed value and market value are important, especially, if the homeowner is going to use the property as a rental. This is called the capitalization approach. Through this method, the rental value of the property is known. The system used to collect data is similar to that of the comparative market approach, that is, it makes a comparison based on similar properties in the area or similar areas that are for rent, to identify the value of all future rents that will be produced by the property. The data that is collected are:
Market Unit Rent
comparison of the cost per square meter, between similar properties for rent
Annual Gross Income
income for one year
Capitalization Rate
calculates the future benefits of the investment
Risk-free Rate
interest rate determined by the government to pause the variation during an investment contract
Inflation Rate
measures the country's inflation through consumer price indices
Real Rate
it is the result of subtracting the inflation rate from the risk-free rate
Liquidity Rate
percentage of investment money that is no longer obtained during the sale or rental of the property
Recovery Rate
percentage of the investment that is recovered at the end of the useful life of the property
Conclusion
Even though the assessed value is essential for taxpaying purposes, the market value does still matter for a variety of reasons as indicated above. As you think about your options for buying a home, bear in mind that the property tax rate and assessed value are variable and subject to change. If you want to know more about the assessed value and market value, go to the Goalry Platform and head over to the Taxry store.