Types of Real Estate Values Buyers and Sellers Should Know — RISMedia
Sometimes understanding a home’s values can be tricky. When you’re not in the real estate business, things like market values can be a foreign topic.
Several terms are thrown around, which can lead to confusion. You might hear estimated value, appraisal value and market value. These three real estate terms have different meanings.
We’ll look at all three so you can better understand when they come up. It is essential to know what they mean, in order not to make bad real estate decisions.
Each of them is very different from each other. Let’s look.
What is assessed value in real estate?
The assessed value is a placeholder assigned to what the local government deems appropriate as the amount of taxes needed to cover local credits charged to the town or city.
In other words, the assessed value is what the local government has determined the property is worth for tax purposes. Market value is what a buyer is willing to pay for the property.
The assessed value of a property is rarely the same as the market value. See Assessed Value vs. Market Value via Maximum Real Estate Exposure in the reference above for an in-depth analysis of their differences.
Unfortunately, some real estate agents confuse the public by advertising real estate listings. They will say things like “come see the great value of this house which is listed under assessed value”.
So what! Many homes are listed under assessed value! Likewise, many are listed and sold above estimated value. They have little correlation between them.
When buying or selling a home, you should never consider the property’s assessed value to be its fair market value. It would be a big mistake.
What is fair market value in real estate?
Fair market value is what a buyer is willing to pay for a property and what a seller is willing to sell.
However, assessed value is the value assigned to a property by the government for tax purposes. The two values are often different, as the government may be unaware of recent real estate market trends.
It becomes essential to understand this when selling or buying a property, as the fair market value may be lower or higher than the assessed value.
To determine the fair market value of a home, real estate agents prepare a comparative market analysis or one broker price opinion. The market analysis will compare the subject property to similar homes sold nearby.
Realtors will try to use properties with the most similar characteristics such as square footage, number of bedrooms and bathrooms, location, condition, amenities, and land desirability.
They will generate a report detailing the adjustments between comparable properties. Once adjustments are made, a final determination of market value can be created.
What is the appraisal value in real estate?
A licensed real estate appraiser determines the appraised value of a home.
The appraised value of a home is determined by a licensed real estate appraiser and is based on many of the same factors that a real estate agent would use, including the size, location, age, condition and amenities of the property.
In theory, the appraised value of a home should be similar to the market value determined by a real estate agent. Sometimes they are, and sometimes they are not. Buyers and sellers should understand that an appraisal and a market analysis are both opinions of value.
Appraisers and real estate agents can be wrong. Sometimes consumers believe what a reviewer says is gospel. It’s not. Reviewers are human, just like the rest of us. They make mistakes.
When buyers get a home loan, real estate expertise is required in most transactions. Mortgage lenders will require an appraisal unless there is significant equity in the property.
Lenders generally only waive an appraisal when there is more than twenty percent equity. Mortgage lenders will also require an appraisal when homeowners want to refinance their existing loan.
Final Thoughts on Types of Real Estate Securities
Understanding these three values is especially important when buying or selling a home. You never want to make crucial decisions based on things you shouldn’t.
The perfect example is trying to correlate the assessed value with the value of a home. To think that the assessed value is the same as the market value would be tantamount to trusting a online value estimate. The chances that this is not the exact value are high.
When buying or selling, talk to a reputable local real estate agent who understands pricing.
Bill Gasset is a nationally recognized real estate leader helping people buy and sell real estate in the Massachusetts metro area for 35 years. Bill is the owner and founder of Maximum real estate exposure. For the past decade he has been one of the top RE/MAX REALTORS® in New England.