Most people do not understand how different these words are in the world of Real Estate and I hear them used interchangeably very often. However, the difference is a very good thing to learn for Buyers and Sellers.
Tax Assessment refers to the monetary value the local Tax Assessor chooses to determine property taxes. This number is loosely based on sales in the area and the numbers can be all over the place. Imagine you keep up on your property and make improvements and your neighbor lets their house go. In both cases, the tax assessment could be similar because the Assessor’s computer generated a number without anyone actually going inside. The Tax Assessor rarely goes inside anyone’s home but local rules on home entry vary from city to city. Some Assessors go in after a permit is pulled and some municipalities go in periodically, for example, every 10 years.
We always hope the Assessment value is as low as possible because we don’t want to be taxed out of our homes. If you see your Assessment don’t complain if you think they have the value too low. No, you should celebrate the lower taxes. I feel most communities would make the Assessment number a certain percentage under the “Fair Market Value” but you might want to check. Some will tax at 100% of “Fair Market Value”.
Buyers often want to use the Assessment number to determine what they should offer on a house. I tell Buyers the sale price should be based on recent sales. Realtors and Appraisers use a “Competitive Market Analysis”. They go out into the neighborhood to find similar homes in interior condition, number of bedrooms, bathrooms, square footage, does it have a basement, does it have a garage etc.? The numbers generated determine the real “Fair Market Value” of the sale to be based on real sales over the past 6 to 12 months.
In most cases these sales are “Arm’s Length” where the Buyers and Sellers do not know each other. As you can imagine, this type of sale will yield the highest price possible. In contrast, the family sale where the Mom wants to sell her house to her adult child for the lowest price possible, is a different sale entirely.
Many Buyers must get a mortgage loan in order to buy a house. In most of those cases, the Lender will require an “Appraisal” to make sure the Buyer is not overpaying. In the past 5 years, I have seen a lot of Appraisals fall short of the price the Buyer bid up to in order to beat the competition and get their offers accepted. Realtors(for the Seller) and Appraisers(for the Buyer) do the same basic job of determining value based on recent sales, however, the Appraiser uses a much more in-depth look to nail the value as closely as possible.
We respect the job the Appraiser does because it is such a thorough analysis. We Realtors rarely contest the Appraisal but once in a while, we might think they got it wrong. We make sure we are armed with the right Comparables before we do so.
If an Appraisal falls short of the offer price and there is no reason to contest, the sale will(rarely) fall apart. 2. Seller will lower the price. 3. The Buyer can give more money to cover the shortfall. I have seen both numbers 2 and number 3. I have never experienced number 1. In the vast majority of cases, the disappointed Sellers have to accept the lower price because the Buyer is unable or unwilling to give more money. In the end, the Seller wants to sell and the next Appraisal will probably not be different than the first.