When discussing real estate values, I often find that I need to explain the subtle differences in terminology. Many people confuse and frequently interchange the terms market, appraisal, and assessed value, but the differences make for a black and white comparison.
Market value is simply the most probable price a particular property should sell for in a competitive and open market with all conditions for that market being met by the property, with the buyer and seller acting on their own accord. In determining value, an analysis is performed, usually by a Realtor. The analysis includes looking at similar properties that have sold recently, as well as looking at similar properties currently on the market and those that were put on the market, but did not sell.
Appraisal value is defined as the opinion of a qualified appraiser, based on knowledge, experience and analysis of the property being appraised, usually for a sale. An appraisal is an unbiased value of the property and is typically ordered by a lender in order to confirm that the value of the property is in line with the value on the mortgage application.
Factors in determining value here are recent sales of similar properties, replacement cost and knowledge of the local marketplace. The main difference from market value is that an appraisal is based on historical data, without any concern of how the market may perform; whereas, the market value places an emphasis on future performance.
The assessed value of a home is the value determined by the town's assessor strictly for tax purposes and is used to create the town's tax revenue. This value is used by the municipality to determine the amount of tax that the property owner must pay. The assessed value is then multiplied by a tax rate to determine the actual tax. Towns use different rates and have a different baseline.
As with the other values, assessors take in the consideration of similar properties, location and condition. The obvious thought process that occurs when real estate values are heading downward is that homeowners' tax bills must also be coming down, too. This misconception is because the assessed value is a trailing number. For example, in Newburyport, the 2011 assessments should reflect 100 percent of market value as of Jan. 1, 2010. But these assessments are based on the market activity that occurred during the calendar year 2009.
So, you can see how a property can have different values at the same time, and if the market was in a vacuum for an extended period of time, theoretically, all three would be the same. Usually, these fluctuate with each other in an orderly manner, but about a dozen years ago, things began to go awry.
As the market value kept increasing, sellers became greedy. Not only were sellers asking for more than the market value, but buyers were paying the price, and lenders were pushing through the appraisals in order to make the sale happen. It had all the makings of a "perfect storm," and nobody was policing it. Lenders had no issue with the inflated appraisals, as they were selling the mortgages to the secondary market (FNMA), and the Fed was encouraging it. This had little to do with market fundamentals and everything to do with distorted government policies that mandated loans to marginal borrowers and set off a national mania for real estate wealth and a flood of temporarily easy credit. As we know, it all came to a head when too many homeowners became over extended and the properties became Wall St. toxic assets.
What we have learned from this is not only how greedy the lenders became when left alone, but that more controls are needed. As a result, the complete mortgage process has become more stringent with a tougher appraisal policy.
So, as you look at your different values, remember that the assessed value will be based on the market activity of two to three years earlier, and in the current marketplace, the appraised value probably will be lower than the market value. So, if you wish to sell, price it correctly.
• • •
Bill Barrows has been a local Realtor for 18 years. He can be reached at firstname.lastname@example.org.