Assessed Value vs. Market Value: What’s the Difference?

What Is Assessed Value?

Assessed value is the value of your home for the purpose of calculating your property taxes. The assessor’s office in your city or town will decide on your home’s assessed value, and it will typically use a formula based on state law.

For example, in South Dakota, assessed value is equal to 50% of market value. A home with a market value of $300,000, then, would have an assessed value of $150,000. Municipalities will use a formula to calculate property taxes for the home based on that figure. As it’s based on market value, assessed value incorporates elements including the home’s condition, location, size and any recent renovations made.

The same way market value changes over time, assessed value can also change over time. Property taxes are generally calculated annually, on a schedule determined by your state. It’s common for property assessments to get updated every five years. States and municipalities can revise an assessed value sooner when renovations or damage change the property dramatically.

State and local governments can also set limits on how often, or how by much, your home’s assessed value can change. In California, for example, a home’s assessed value can increase by either 2% or the current inflation rate per year—whichever is lower.

Assessment vs. Appraisal

An appraisal is ordered by a lender during the mortgage application process to determine how much your home is worth. Appraised value is a key data point in a lender’s decision to approve or reject your mortgage application, since it helps lenders avoid providing loans that are greater than a property is worth. If you need a loan for more than 97% of the home’s appraised value, for example, it’s likely the lender will decline to work with you.

That makes appraisal altogether different from assessment, since it’s not connected to property taxes. Instead, a professional appraiser tours the home and compares it to similar recently-sold homes in the area, and then submits a report with the appraisal to the lender. What is similar to assessment is the constellation of factors that can go into an appraisal: The condition of the home, for example, and its size and number of rooms.

What Is Market Value?

Market value is the probable amount your home would sell for right now on the current market to a knowledgeable and willing buyer. It may also be referred to as fair market value. While market value takes into account a home’s characteristics, such as its square footage and location, it’s also based on economic factors like interest rates, the current supply of housing and comparable sales in the area.

Market value is crucial to understand no matter where you are on the homebuying continuum. As a buyer, gauging a home’s market value can help you decide if it’s a good match for you, both budget-wise and as an investment. As a seller, finding the fair market value helps you price your home. If you need to move quickly, for example, you could choose to list it at the lower end to attract would-be buyers.

What Affects a Home’s Assessed and Market Value?

Here are the components that contribute to a home’s assessed value and market value:

• Physical attributes: A home’s age, condition, architectural style, quality of construction, outdoor space and number and size of rooms will all factor into its valuation. A larger home will naturally have a higher value, but if it’s aging and in need of extensive repairs, that will cut into its listing price.
• Housing market conditions: Economic elements like inflation and unemployment rates, construction costs, mortgage rates and a current housing shortage or surplus also impact a home’s value. A home with issues may fetch more in a low-supply environment than when there’s a surplus of housing, for example.
• Location: The home’s neighborhood, proximity to amenities like grocery stores, its school district and even the condition of the surrounding properties can affect value. If there’s a lot of noise from local train tracks or a nearby airport, for example, that could mean a lower asking price.
• Comparable home sales: Assessors use recent sales of comparable homes in the area to help determine a home’s assessed value. So do real estate agents when they create a comparative market analysis for a seller eager to see their home’s market value before listing it. A home is considered comparable to yours if it is similar in square footage, condition, age and features.

What to Do if You Disagree With Your Home’s Assessed or Market Value

If you believe the tax assessor, appraiser or real estate agent made an error in calculating your home’s value, take these steps:

• Check your local tax assessor’s review process. Your municipality should have a structured process for contesting your assessment. New York, for example, encourages homeowners to have an informal conversation with their local assessor about the issue, and then follow up by filing for a formal review of the assessment if it’s not resolved. Find your state’s taxation agency in this list provided by the Federation of Tax Administrators, a trade group serving state tax professionals.
• Initiate a “reconsideration of value” process with your lender. If you believe the lender is using an incorrect appraised value during your mortgage application, ask the lender to reevaluate it using the reconsideration of value process. This may have happened if the appraisal contains inaccuracies or inappropriate comparable home sales. Contact your lender to dispute the appraisal and request a new one.
• Communicate with your real estate agent—and do your own research. As a seller, your real estate agent will likely recommend a listing price for your home. If you believe the market value they’ve determined is too low, ask how they came to that figure. Make sure your home’s value is in line with comparable home sales in your area. You may find, however, that the environment has changed since your next-door neighbor sold their home even a few months ago. Disagreeing on a home’s market value could simply be a reflection of a changing market.

The Bottom Line

Determining property value is an important step along the homebuying journey, from listing a current home to applying for a mortgage to calculating how much you owe in property taxes. But a home’s assessed value and market value are two very different data points. Understanding the difference between them will help you bring a critical eye to any valuation that affects how much your home is worth.