“Why is the assessed value vs market value so far off for this property?”
Many buyers have asked this question thinking a ratio of assessed value offers a shortcut to a property’s fair market value. While I use and can suggest many factors and figures to determine a property’s fair market value, I do not ever look at the assessed value when pricing a property. In fact, the only time I consider a property’s assessed value is when I want to provide buyers with the figure they will pay for property taxes.
The fair market value is the price agreed upon between a willing and informed buyer and a willing and informed seller under usual and ordinary circumstances (not under duress). The fair market value is the highest estimated price in terms of money which the property will bring if exposed for sale on the open market with reasonable time allowed to find a buyer who is purchasing with full knowledge of all the uses and purposes to which the property is best suited and for which it can be legally used.
In contrast, the assessed value is the dollar value assigned to a property by a public tax assessor for the purposes of measuring applicable taxes. Some states require assessed value to be a percentage of the real market value, but most do not. In Massachusetts, Town Assessors are required to submit assessed values to the State Department of Revenue for certification every three years. Assessors review the real estate sales market data every year and therefore reassess values each year. Many states do not allow the assessment value to be increased unless the home is sold or improvements are done to the home (called Proposition 13 protection in California). If market value falls below assessed value, the home owner may petition the tax collector for an abatement.
Since fair market value and assessed value differ in purpose and in how they are determined, an analysis of assessed value vs market value does not provide a consistent ratio from which to judge the merits of one metric or the other. After charting the two values looking for a correlation, the results show assessed values are all over the place in relation to a property’s fair market value.
I suggest using better methods of gauging a listing price’s merit in the current market. A comparable market analysis (CMA) is the best method for determining probable price of a property, but even price per square foot or the ratio of sale price to list price can be used as quick metrics of a list price’s validity in today’s market. Our Realtors are available to provide you with a CMA if you are considering buying property or thinking about listing your home for sale.