Assessed Value vs Market Value: Understanding The Difference

When you buy a home, covering the monthly mortgage payments may be one of your top concerns. Affording the payments—including the home’s principal, interest, homeowners insurance and property taxes—may seem easy in the beginning. But first-time homebuyers may not be planning for the reality of future property tax increases—a major oversight when considering assessed value vs market value. Your first property value assessment may be more than a surprise. The larger estimate of your home’s value, and bigger property tax bill that follows, can be downright shocking.

“Property taxes are usually the second-highest expense of owning real estate,” said Anthony DellaPelle, CRE®, partner at McKirdy, Riskin, Olson & DellaPelle, in Morristown, New Jersey. While you can’t control property taxes, you can be proactive by improving your knowledge. The best way to try and protect yourself is by understanding the basics. There are some key differences between your home’s assessed value and market value that every homeowner should know.

What is market value?

When you start looking for a home, you may quickly experience how market value impacts the homebuying process. You may find yourself competing with others to buy a popular property. Or you may choose to offer less money for an overpriced or less-desirable home. To put it simply, market value is how much someone is willing to pay for a home.

“Market value is generally determined by seeing what other people have paid for similar properties,” said DellaPelle. He said the market value for a home is set by comparison shopping. A comparable home—or “comp” property—may be in the same neighborhood, with similar square footage, number of bedrooms and bathrooms, and lot size. When a home’s asking price is higher than other comp properties, DellaPelle said buyers may decide to shop elsewhere.

“In hot markets, buyers may end up paying more than market value, and in sluggish markets, they may pay less,” said John A. Kilpatrick, managing director of Greenfield Advisors in Seattle. He said the home’s market value is usually the starting point, though.

How market value impacts current homeowners

If you’re not planning to move anytime soon, you may be less concerned with your home’s market value. But there are several ways it may impact your wallet, even when you’re not looking to sell.

As interest rates go down, you may be eager to refinance your mortgage to lower your monthly payments. Or if you have built equity in your home, you may want a cash-out refinance to pay off high-interest debt. You may also consider applying for a home equity line of credit (HELOC) or home equity loan for home improvements.

To qualify, most of these transactions will need a professional home appraisal to determine your home’s market value. The lender may reject your application if there’s not enough equity in the home compared to the value. By staying on top of your home’s estimated market value, you may cut back on the sting of rejection. Plus, you can save yourself from wasting time if you know you won’t qualify.

What is assessed value?

While figuring out a home’s market value may not be precise, there is a definitive process to determine a home’s assessed value. The assessment process is more streamlined because it impacts each municipality’s property tax revenue.

To figure out your home’s assessed value, the local municipality—which is usually your county—orders a property assessor to assign property values to each home. In most states, your home’s assessed value impacts how much property tax you have to pay every year. When your home’s assessed value increases, you can expect to receive a higher property tax bill. If your mortgage servicer pays your property taxes using money from your mortgage payment, then it may raise your payment. Or, if you own the home outright, you will receive a higher annual bill.

Here’s a property tax example calculation from Davidson County in Tennessee.

Assessed property value: $200,000

Taxable property: 25% x $200,000

Assessed taxable value: $50,000

Property tax rate: 3.155% x $50,000

Total property tax due: $1,577.50 per year

Depending on where you live, the property tax calculation may vary. To figure out your home’s property tax—or estimate an expected increase—visit your city or town’s trustee website.

How to determine assessed value

DellaPelle said the exact assessment process may vary by county and state. Each one considers the market value of a property on a specific date, which they refer to as the “assessment date.”

Like your home’s market value, the property assessor may compare your property with similar homes. They may also search the local database of building permits to consider any improvements you have made. The assessor may also factor in any rental income you receive from the property.

Some places may have property assessments every year. But in many places, the municipality skips annual assessments and home assessment values stay the same for a specific number of years. If the tax rate doesn’t increase, you may have the same annual tax bill until the next round of property tax assessments. “In my experience, the tax assessed value may be close to market value, but won’t be exactly the same number,” Kilpatrick said.

At the beginning of each year, you should always double-check your property tax rate and bill. Property tax bills are public record, so you can find yours every year through your city or town’s trustee website. You should also make sure the balance matches your mortgage’s escrow account.

How assessed value and market value work together

Although they aren’t the same number, your home’s market value plays a role in how much your property tax assessment will be. A higher property assessment often means paying more in taxes. “Tax assessors rely on market sales transactions for their work,” said Kilpatrick.

He said they use a mass appraisal model and keep track of all local home sales. They try to be fair when using this data to assign home appraisal values throughout the county. But it’s common for property tax assessments to lag behind the market.

DellaPelle said higher market values don’t always impact assessed values, though. In some places, there are protections for homebuyers who choose to pay above the assessed value. In these cases, he said the local government may not be able to raise the assessment to match.

Value is in the eye of the beholder (and tax assessor)

Whether you own a starter home or your forever home, it’s important to know the differences between the property’s market and assessed value. Both may impact your wallet—as well as your peace of mind—throughout your journey as a homeowner.

At some point, you may receive a property tax assessment that seems too high. DellaPelle said prospective buyers or current homeowners shouldn’t always assume their assessment is fair. It’s possible to contest the property assessment on your own. But if it feels like too much to tackle on your own, you can hire a property tax consultant or attorney.