As a home buyer, you will encounter a variety of prices and values when shopping for a house. In fact, a single home might have three different prices “attached” to it. The assessed value of a particular house might be $245,000. The appraised value might be $262,000. And the list price might be higher than both, at $270,000. All for the same house!
This is a common source of confusion among home buyers. But it doesn’t have to be. By the time you finish reading this tutorial, you will understand the differences (and similarities) between appraised value, assessed value, fair market value, and asking price. You’ll also learn which ones are most important to you, as a home buyer.
Assessed Property Value
Let’s start with what is usually the lower end of the spectrum, the assessed property value.
The most important thing to understand is that the assessed value is not the same as the appraised value. This is a common misconception among first-time buyers. Property assessments and home appraisals are two totally different things.
The assessed value comes from the local tax assessor’s office, which may exist at the town, city, or county level of government. The assessor assigns a value to each property within his or her jurisdiction, for tax purposes. Taxation is the sole purpose of the assessed value. This number is used to determine the property tax assigned to a particular home. These taxes can be used to cover the cost of schools, police and fire services, infrastructure, and other local government expenses.
Here’s what you need to know, as a home buyer: The assessed value is usually lower than the fair market value of a house (defined below). Sometimes it’s a lot lower. So you should not base your offer on the assessed property value of a house. It can help you determine what you might end up paying in property taxes each year. But it’s not very useful when it comes to making an offer on a home, or when negotiating the price with a seller. You’re better off using the fair market value of the home for these purposes. So let’s talk about that next.
Fair Market Value
The fair market value (FMV) is exactly what it sounds like. It is the fair price for a particular home based on current market conditions. It is based on the forces of supply and demand, not the opinion of a city or county tax official. When priced at or near FMV, a property will sell in a reasonable amount of time. When priced well above FMV, the same property will take longer to sell.
You can determine the fair market value of a house by seeing what similar homes have sold for recently, within the same area where the “target” house is located.
Let’s say I’m looking at a 1,500-square-foot, one-story, ranch-style house in a particular community of Richmond, Virginia. I use a website like Zillow, Truila, or Realtor.com to see what similar homes have sold for recently. All of the recent sales fall within the range of $270,000 to $280,000. So that is a fair market value for the type of house I am seeking.
If the seller is asking much more than $280,000, the house should have special features to justify the higher price (like a recently renovated interior, a custom swimming pool, a larger lot, etc.). We will talk more about asking prices below. First, we need to cover the appraised value – and how it differs from the assessed and fair market values we just covered.
The appraised value of a house is the result of a home appraisal, which is conducted by a licensed appraiser. The appraisal is an evaluation of the home and local market conditions used to determine the market value of a house.
In some ways, the appraised value is similar to the fair market value. The difference is that the appraisal is one person’s opinion, whereas the fair market value can be determined by anyone who evaluates local real estate conditions. I can go onto Realtor.com and look at recent sales prices to come up with the fair market value of a particular home. The appraised value, however, must be issued by a licensed home appraiser. They overlap, but they are not the same thing.
In most cases, it is the home buyer’s mortgage lender who orders the appraisal. According to John Bredemeyer of the Appraisal Institute, “the goal of an appraiser is also to estimate the true market value of a property, so that the lender can make an informed decision when providing a loan.” (Source: New York Times article, “Market vs. Appraisal: What’s the Real Value?”)
So you can think of the appraised value as one person’s informed opinion, based on property and market conditions.
Like real estate agents, home appraisers use recently sold comparable homes — or “comps” — to determine the current value of a particular property. They also make price adjustments to account for differences between the subject home and the comps. For instance, a house that is mostly similar to the comps, but with a much larger lot, will likely be adjusted upward in price.
Using comps is the “market approach” to determining the appraised value. Home appraisers sometimes use the “cost approach,” as well. The general idea here is that a buyer should not pay more for a house than it would cost to rebuild (or to build a similar home). But in most cases, it is the market approach that has the biggest influence on the final appraisal number. That’s why the appraised value is similar to the fair market value of a house — they are based on the similar factors of supply and demand, recent sales, etc.
So we’ve covered the appraised value vs. the assessed value vs. the fair market value. We have one more item to discuss, and that is the seller’s asking price, also referred to as the list or listing price.
(Sidebar: Real estate agents are often taught to instruct their clients to use the term “list price” and to avoid using “asking price,” since the latter suggests they don’t expect to get it.)
Whatever you call it, the definition is the same. It’s the price at which the home is listed for sale. It’s typically the seller who comes up with this number, usually with input from a real estate listing agent. The seller may even have a professional home appraisal done, to help identify the current market value of the property. Or they might just use those comparable sales figures we talked about earlier.
On the other hand, some sellers seem to pull their list / asking prices out of the clear blue sky, without any sense of realism. Maybe they base the value on the amount they currently owe on their mortgage, or the amount they paid for the house years ago. But neither of these things determines the fair market value of a home.
What a Home Buyer Needs to Know
We’ve covered a lot of different terms and concepts in this tutorial. So let’s do a quick recap:
- Assessed property value comes from the local tax assessor’s office. It is used for taxation purposes, primarily, and is not very useful to home buyers who are trying to shape their offers.
- Fair market value (FMV) is the price a home will likely bring in the current market, based on the current balance of supply and demand. Notice the emphasis on the word “current.” When a house is listed for sale at or near the fair market value, it can be expected to sell in a reasonable amount of time. You can determine the FMV of a property by using comparable sales, or comps.
- Appraised value is the result of a thorough home appraisal conducted by a licensed appraiser, often at the request of a bank or mortgage lender.
- Asking price, also referred to as the list price, is the price at which the home is being offered for sale. It may be realistic and based on current market conditions. Or it may be pulled out of left field as the result of wishful thinking on the seller’s part. It is your responsibility, as a home buyer, to determine which of these is the case.
Home buyers should be most concerned with the fair market value of a home. That’s what you should base your offer on. After all, it is the market that determines what a particular asset is worth at a particular time. The appraised value can also be useful to home buyers, but it should be considered alongside the current market value. The assessed property value can help you determine your property taxes, but it’s not useful during the offer and negotiating stage. The seller’s list or asking price is simply a number attached to the house — it may or may not reflect current real estate conditions.