The Difference Between a Home’s Appraised Value, Assessed Value, and Market Value

There are quite a few different ways to determine a property’s value.  As a real estate broker, I most often determine a fair asking price or listing price based on the relevant comparable sales.  Other entities such as the county tax assessor may also use the sales comparison approach to determine a given home’s value; yet, our valuations may be vastly different.  That’s because the different types of valuations are ultimately defined by the entity evaluating the property’s worth.  

Appraised value is a term used to describe the lender’s valuation of a given property.  When you buy a home with a loan, the lender needs to determine what the value of the home is in order to limit their risk.  The lender orders an appraisal of the subject property once a buyer is under-contract on a property, but before the closing date. The appraiser then compiles a report known as an appraisal.  The report is most commonly performed using the sales comparison approach in which the appraiser identifies three to six similar properties that have sold recently in the area, and then makes adjustments to these properties in order to determine the subject property’s appraised value.  Occasionally, the appraiser may use a different approach such as the cost approach or the income approach to determine the appraised value.  The cost approach uses current construction costs combined with depreciation to determine the appraised value while the income approach uses rental revenue to determine the appraised value.  The sales comparison approach is most-commonly used in residential real estate, and if you are purchasing a new home or refinancing an existing one, the end result of this analysis is a determination of appraised value. Ultimately, the appraised value is what the lender determines your home is worth.

The assessed value of a home is what a county tax assessor determines a home is worth for the purpose of levying property taxes. Oftentimes, I will have buyers looking at a home’s assessed value as an indication of a fair asking price.  However, the assessed value is rarely the same as the market value.  The assessed value is determined annually by the county and market value can change weekly.  Additionally, the assessed value is usually determined from a computer.  Looking at similar size homes on the same street only tells half the picture.  Just because your neighbor’s home is worth $600K doesn’t mean yours is too.  What if your neighbor’s home has solid gold toilets and italian marble while you're still rocking lime green linoleum?  The county tax assessor likely has no idea that your home isn’t worth as much as your neighbor’s. Unless you say something and step up to protest your assessed value, the county will continue to value your home at the rate they think is correct.  Texas is also a non-disclosure state which means that home sale values are not public information. They do rely on information gathered from real estate syndication sites like Zillow to determine the asking price for a home. They also know when a home is sold, they just don’t necessarily know the exact sales price. Thus, the assessed value is the county tax assessor’s best guess as to what your home is worth. 

The market value of a property is what a buyer is willing to pay for a property and a seller is willing to sell a property for in an open market.  The market value of a property is oftentimes quite different from the assessed value, and may even be vastly different from the appraised value for a given property. Recently, in the Austin real estate market we have seen widespread waiving of appraisal contingencies by prospective buyers. When a buyer does this, they are saying that even if the lender determines the appraised value is lower than the contracted sales price they will proceed with the sale and bring additional cash to the table in order to close at the contracted price.  Thus, the market value is higher than the appraised value.  Alternatively, you could have a home that appraised for a value that is higher than what buyers are willing to pay. The market value is simply what a buyer is willing to pay for a given property.  

When you are trying to determine an appropriate asking price to list your home for sale for or trying to figure out how much money you should offer on a home you need to think about all of these values. However, the market value is ultimately the value that will be the most important.