Real estate is a dynamic industry that is continually evolving. If you’re a buyer or seller, you must have a fundamental understanding of the concepts of assessed value and appraised value. In this article, we will talk about what market value in real estate is, how it’s determined, the factors that affect it, and why it’s important.
We’ll also talk a bit about tax assessed values, used to determine your property taxes, which are very different than an appraised value found through a comparative market analysis or a final appraisal report conducted by a professional appraiser.
You will appreciate how knowing your home’s market value can help you make informed decisions during the process of buying or selling a property. Also, in a state like Texas, it gives you the knowledge to protest your property taxes if your property tax bill suddenly increases.
As you can see, there are many ways to determine the value of your home, and each one has its place and proper use.
What is Market Value in Real Estate?
Market value, in simple language, is how much a buyer is willing to pay for a property in current market conditions. It’s the most probable price that a property of similar size, location, and condition, among other things, would sell for under normal circumstances. Real estate professionals use historical property data and comparable sales to determine a home’s value on the open market.
How is Fair Market Value Determined?
Real estate market property values are determined by a wide range of factors, some of which include:
Location: The property’s location plays a significant role in determining market value. Homes in desirable locations such as waterfronts or areas with a growing job market and business development are likely to have higher market values.
Size and Condition: The size, functionality, condition, and quality of construction of a home all play a factor in determining its market value. Homes that are well-maintained and have upgraded features in demand in the current market will often command a higher market value.
Supply and Demand: When there is a high demand for homes accompanied by a low inventory in a particular area, it can drive up the market value. Conversely, the value of a home declines when there is a large inventory and a low demand.
Appraised Value and Its Role
An appraisal determines a property’s fair market value performed by a professional appraiser. Appraisals are required when purchasing or refinancing a property. The appraiser examines various factors, such as the property’s condition, recent sales of similar properties in the area, location, and age of the property, among other things.
Using this information, they provide an unbiased, professional opinion of the value of a home, which serves as the baseline for the transaction and the underlying home loan. The home appraisal value essentially contributes to the fairness of the price for the buyer and the seller.
Does market value affect appraisal value? Yes, but only based on sold properties. Appraisers don’t use active listings or pending sales when doing their reports (although they may note them if there is something exceptional about them or they are seeing a trend that is worth adding to their report).
A mortgage lender will base your loan amount on the home appraisal value, and mortgage lenders will not lend you more than the home’s appraised value.
Market Value vs. Tax Assessed Value or Sales Price
While the tax assessed value and the sales price of a home may seem like relevant measures of its value, there are often significant differences between the home’s tax assessed and appraised value.
The Tax Assessed Value Affects Your Property Taxes
The tax assessed value is used to calculate property tax and is generally determined by taking the total value of the property and adjusting it to allow for exemptions and other factors set by state laws. These tax assessed values determine how much property tax you will pay and are conducted by your local government tax assessors.
On the other hand, the appraisal value is based on property data and comparable sales information. The sales price is the amount agreed to by a buyer and seller during the transaction.
Computers are Great, But They Don’t Replace Humans
Knowing your home’s fair market value and the factors determining it is essential for anyone buying or selling property. Understanding what contributes to market value helps you determine actual market value or a suitable sales price, which provides a sense of fulfillment and encourages successful transactions.
While there are many algorithms that can estimate your home’s value, nothing can replace the value, knowledge, and experience of a Realtor that can see your home in person. These automated valuation methods are great tools but are not the final answer. If your agent shows you a push-button valuation of your home, you may want to think twice about your agent.
If you’re considering buying or selling a property, speak with your real estate agent to discuss the value of your home and other factors specific to your transaction. Working with a real estate professional ensures that your home purchase or sale achieves its full potential.