Does Market Value Equal Assessed Value?
Assessed value and market value are not the same thing, despite what some beginning real estate investors might think. This misconception can lead to offers being rejected outright by the seller, real estate agents refusing to work with them, and fellow investors rolling their eyes at the beginner’s naivety.
Assessors do not want to have the maximum value for tax purposes, as one might expect. Instead, assessors use a number of different methods to determine the value of a property for tax purposes. These methods include looking at comparable sales in the area, inspecting the property itself, and taking into account any special features or amenities that the property has to offer.
As a result, it is important for investors to be aware of the difference between assessed value and market value before making an offer on a property. Otherwise, they risks making an offer that is significantly below the property’s true market value.
How baking a cake is similar to real estate value
Let’s use this non-real estate situation as an example of the difference between market value and assessed value.
Let’s say your favorite baker goes to the store and spends $10 buying ingredients for a cake. She pays a sales tax to the government on the assessed $10 value of the ingredients for the cake. After the cake is baked, she sells it to you for a market value of $30.
You see more value in a cake that is already baked than you do in the raw ingredients. Because of the cake’s market value, you’re probably not going to argue that you should only be charged for the $10 worth of ingredients, at least if you ever want her to bake you another cake.
The Hidden Purpose Of Assessed Real Estate Value
The assessed real estate value will work in a similar way.
Real estate assessors play an important role in determining the value of property for tax purposes. They analyze a variety of factors, including the construction date of the property, the materials used to build it, the size of the lot, and recent sales comps. However, they can only take these factors into account up to a certain point. After that, they must add the individual assessed values together for one giant lump-sum assessed property value. This process can be difficult, but it is necessary in order to ensure that property taxes are fair and accurate.
The assessment of a house doesn’t matter if the market value is $100,000 but only provides enough tax revenue for budget requirements.
What Market Value Really Means
Income property investors look at real estate values differently than assessors do. Of course, they take the cost of a property into account when computing its value for tax purposes; but what interests them most is how much rental revenue can be generated from it and if there’s potential appreciation on top as well!
In essence then you could say that beginning buyers who think an assessed price should sell instead off market don’t really know what investing in properties really means- unlike high roller type individuals with huge sums available to invest who buy large bundles during depressed times (and later resell). Unfortunately this leads these less experienced players down frustrating paths where low ball offers
How To Determine Market Value
The market value of a property is the price that a buyer is willing to pay for it at a certain point in time and the price that the seller of the property is willing to accept. Unlike the opinion of the tax assessor, market values ebb and flow based on the law of supply and demand.
This means that market value can be subjective at times. In part, that’s because the value your competitor places on the house across the street may be different from the market value you see the same house as having. However, there are certain objective factors that can help you determine market value, such as recent sale prices of similar properties in the area. By taking these factors into account, you can get a good idea of what a property is really worth on the open market.
With that in mind, there are a number of factors you can use to make determining market value more objective:
1. Property appearance
The exterior appearance of a house is an important factor in determining its market value. This is because the way a house looks can have a big impact on how easy it is to rent. If a property has good curb appeal, it will be more likely to attract tenants.
On the other hand, if a property has poor curb appeal, it will be less likely to attract tenants. As a result, investors use curb appeal as one of the main factors when determining the market value of a property.
2. Interior features
The amount of living space, the number of bedrooms and bathrooms, the quality of the flooring and appliances, and the age of mechanical systems like HVAC and plumbing all affect a property’s market value.
For example, a house with only two bedrooms will have less value in a market where most renters are families, because it doesn’t have the features that most tenants are looking for. Or, a 4 bedroom home in the same market that is badly in need of a new roof will have a lower market value because sooner or later the owner will need to spend money on a capital improvement. By taking these factors into account, you can get a better sense of what a property is really worth.
3. Supply and demand
Market values are always in flux, moving up and down in response to a number of factors. In a seller’s market, values will tend to be high because there is more demand for rental property than there is supply. This situation is often caused by population growth or a strong economy, both of which lead to more people looking for places to live.
When the market cycles downward, values will likewise decline as there are more sellers than buyers. This can be a good time to invest, as tenant rents have not changed even though market values have decreased. However, it is important to be aware of the potential risks involved in any investment, no matter what the market conditions may be.
4. Financing options
The cost of capital is one of the most important factors in determining the market value of income-producing real estate. At today’s historically low interest rates, the monthly mortgage payment on a $100,000 house is around $550 per month (PITI).
However, if interest rates rise by just 3%, the monthly mortgage payment would increase to over $700, which would reduce the property’s cash flow and market value. Therefore, it is clear that the cost of capital has a significant impact on the market value of income-producing real estate.
5. Comparable sales
Recent sales prices in the immediate area have a big impact on market value. Even if the cash flow from the property can support a higher purchase price, it might not be a good idea to pay more than what the recent sales suggest. The property may not appraise for a higher purchase price and you’ll make less money when it’s time to sell because you overpaid when you bought it. It’s important to be aware of recent sale prices in order to avoid paying too much for a property.
How To Determine Assessed Value
The method municipalities use to determine assessed value can be complex and also varies from one county to another. But in general, no matter where you invest, assessed valuations have the following things in common:
- Assessors assign a value to your property for tax purposes by gathering information about similar property
- Tax collection is the only reason for determining assessed value
- Property taxes collected from assessed values are used to pay for schools, police and fire services, infrastructure improvements, and other government operating expenses
- Assessed value is a percentage of the market value of the property and some municipalities charge higher percentages than others
- Politics can also affect assessed values, particularly after an election when a politician has promised to lower taxes, or even raise them in real estate market that are not landlord-friendly
- For these reasons, assessed value is almost always lower than market value, and oftentimes much, much lower
Two Other Types Of Value
In addition to market value and assessed value, there are two other types of ‘value’ that you should be aware of when investing in real estate:
Appraised value
Appraisals are important when you are taking out a loan to buy a property. The lender will order an appraisal from a licensed professional to make sure that the value of the property is at least as much as the purchase price. It is important to get an appraisal because you want to make sure that you are not paying too much for the property.
You also want to make sure that the value of the property is not less than the purchase price, because that would mean that you would owe money on the loan. The appraised value is what the property is worth in the market. Ideally, the appraised value will be the same as the contract purchase price. This means that you and the seller have determined the correct market value of the property. If the appraised value is less than the contract purchase price, you may want to renegotiate the price with the seller.
Listing Price
The asking price of a property is the seller’s perceived value, which may or may not be realistic. You should always do your research and find out what other properties are selling for in order to get an idea as whether this one makes sense given all factors involved before making any decisions about purchasing it – even if they seem like perfect fits!
Value Is In The Eye Of The Beholder
There are many factors that affect the market value of real estate, such as who’s looking at it and what they’re seeing.
In the section on Market Value earlier in this article, we said that the value you place on a house may be different from the market value another investor sees the same house as having.
If you have a house that is currently renting for $800 per month and another similar property across town costs 100K, it would make sense to assume they are both worth around same amount.
But you are not the only one who sees this property’s potential. The other investor doesn’t think it will ever sell for what he wants because of its lot size, but you know that there’s an endless supply of people looking to buy in this market and eventually they’ll come around!
The city council just gave the final go-ahead for an apartment building that will soon be erected on this vacant lot. The single family houses in your area are much more attractive to renters than apartments, so you know there’s no chance anyone can ever buy one of these properties unless they’re looking at least $100k worth!
By using knowledge about local real estate markets, you can add value to your investment while the apartment developer does all of work. As demand increases for rental properties in this area and people prefer living there over cramped apartments units – rents will surely go up resulting greater profit margins on each property due solely from increased popularity among renters who want more space
.png)
