Understanding the Difference Between Market Value and Assessed Value

Though many assume that a property’s assessed value and market value are related, there is often no real correlation. This is due to the fact that they are determined in different ways and for different purposes.

Understanding Market Value

To put it simply, the market value of a home is the point at which the buyer’s willingness to purchase a home meets the owner’s willingness to sell it. A home’s market value can fluctuate based on a number of factors, including available inventory, interest rates, and season.

The market value is an estimate that is created by considering several characteristics of the home including:

  • Curb appeal
  • Condition of both the exterior and interior
  • Lot size
  • Style
  • Public utility options
  • Size
  • Number of rooms
  • Quality of construction
  • Included appliances
  • Amenities
  • Type and age of heating and cooling systems
  • Energy efficiency

In addition to the actual house itself, other factors are used to find a reasonable market value. They include the location of the home, recent sales prices for similar homes in the area, and the inventory of homes versus number of buyers.

The market value of a property can be used for several things. When a home is put up for the sale, the listing agent will use the market value to work with their sellers to find a fair listing price. A buyer’s agent is going to estimate market value on their own when advising their client on what to offer. There is no definitive market value; it all depends on what the buyer is willing to pay and what the seller is willing to accept.

Understanding assessed value

The main purpose of a home’s assessed value is taxation. The assessed value of a home is determined by an assessor. Assessors work for the municipality that will be levying taxes on the property, which is most often the county the property is located in. Assessment standards and criteria vary between tax regions, but they’re nearly universal principles.

Generally, the assessor will look at the selling prices of similar properties in the area, the property’s most recent selling price, the value of any improvements that have been done to the home, income generated from the property, replacement costs of property, and other factors. This is then multiplied by an assessment rate, which is a uniform percentage set by each tax jurisdiction, usually 80 – 90%. For example, if an assessor found the value of a home to be $100,000 in a county with an assessment rate of 90%, then the assessed value would be $90,000.

The assessed value is the value on which local government calculates property taxes. It’s important to note that the main purpose of assessed value is for taxation. Often times, the assessed value and market value will be very different, with the assessed value being lower than what a property would sell for on the open market. For example, if a home was last sold 15-20 years ago, most likely its assessed value will be lower than that of a similar home that sold just two years ago.

Additionally, since assessed value is used to calculate property taxes, a homeowner dissatisfied with their property’s assessment can generally file a challenge with the local assessor’s office, which can take the form of tax abatement.

Assessed value in NYC

In NYC, a property’s assessed value is determined by the market value’s assessment rate. The assessment rate, in turn, is dependent upon the property’s tax class. Properties in tax class 1 can count on a 6% assessment rate, while those in tax class 2, 3 and 4 have a 45% rate applied to assessed value calculations.

Assessed value can increase from year to year, independent from actual market dynamics. However, the legal framework of New York State has limitation for how much assessed values can increase for selected tax classes.

For tax class 1 properties, the assessed value may increase 6% year-over-year, but no more than 20% over a five-year time frame. The assessed value of properties in tax class 2a, 2b and 2c can increase 8% Y-o-Y and no more than 30% over a five-year period. It needs to be noted that this applies to properties with no more than 10 units.

Class 2 properties with 11 or more units and class 4 properties are subject to transitional assessed values, meaning that 20% of the change is factored in yearly over a 5-year period.

 

Eliza Theiss

Eliza Theiss

Eliza Theiss is a senior writer reporting real estate trends in the US. Her work has been cited by CBS News, Curbed, The Los Angeles Times, and Forbes among others. With an academic background in journalism, Eliza has been covering real estate since 2012. Before joining PropertyShark, Eliza was an associate editor at Multi-Housing News and Commercial Property Executive. Eliza writes for both PropertyShark and CommercialEdge. Reach her at [email protected]