On Real Estate: Assessed value vs. fair market value: what’s the difference?
By Jim Hagerty
It’s not a secret that the average homeowner may be a bit confused about the difference between assessed and fair market value (FMV). Generally, assessed value is the value the county property assessor places on a property to determine the amount of property tax the owner is required to pay. Fair market value is the value a certified appraiser comes up with based on the sales of similar real estate in a given area.
To determine a value on a home, an appraiser examines square footage, amenities such as central air conditioning, modern heating and remodeled basements and attics—anything that would enhance the appeal and make it desirable to potential buyers. The appraiser searches for nearby properties with either similar or the same features. This allows them to compare the subject property with what’s in the area to arrive at a value that buyers would like to pay for the house if it goes up for sale. This value can move up or down depending on what the market is doing. When fair market values increase, it means a homeowner increases his equity and, ultimately, his net worth. This is almost always a happy time for a property owner.
When assessed values increase, it’s not as jubilant for an owner, as it almost always means higher property taxes. Receiving (or not) the old “Your home has been re-assessed” letter from the county often has homeowners scratching their heads wondering how their property taxes can increase when fair market values are falling. The answer isn’t a terribly simple one, but it is, rhetorically, easy to understand.
An assessed value is also determined by the county by looking at what homes in a specific area are selling for. Property assessors use sales prices (market values) as a basis for determining assessed values and property taxes using the county’s tax rate. Simple? Well, not as simple as it should be.
In a perfect world, an assessed value and fair market value should be relatively close, give or take a few thousand dollars. However, during times where real estate markets fluctuate and properties are improved in significant numbers (finished basements, additions), sizable disparities between the two are common. These disparities can go undetected for years before an assessor updates county records to reflect new assessed values. It is common, during such an occurrence, for properties that haven’t undergone any improvements to also have their assessed values increased. This is where an age-old argument begins.
To an assessor, an increase in assessed value, resulting in higher property taxes, should come with a sense of positivity that a home is suddenly worth more and its neighborhood is now more desirable. Some homeowners don’t always fall for such a trite claim. In a topsy-turvy market, rich in jobless increases, foreclosures and lack of consumers spending, selling a home for an assessed value can be difficult. Monetizing a property to do improvements can also be a gamble, as it may not increase the assessed or fair market value to produce a desirable return on investment (ROI). Which argument is correct? The answer, again, is not a cut-and-dried one. The county will stand firm on its assessments if homeowners say nothing. However, owners do have options to make sure they’re paying property taxes that correctly and fairly reflect what their homes are worth. Contesting property taxes does take some leg work, but it is often worth the time to locate area comparables and list reasons why a property isn’t worth as much as an assessor feels it’s worth. Paperwork is minimal, and the trip to the assessor’s office is virtually painless.
Keep in mind, many markets, before the banking crash, included thousands of properties appraised for significantly more than they were worth. When reality set in and market values started to drop with the foreclosure boom, these values began to inch down to match assessments. The problem is far from corrected. Some area homes are still assessed for more than owners can sell them for.
From the September 16-22, 2009 issue.
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