If you’re new to real estate investing, you might find yourself confused by many of the terms used by real estate agents and other investors. Two of these terms, tax assessed value and market value, are two vastly different things, and it’s important to know the difference. Continue reading to learn more about tax assessed value vs. market value and how these two numbers can affect your investment decisions.
What is Tax Assessed Value?
Tax assessed value, often referred to as simply “assessed value,” is specifically used to calculate the amount of property taxes that will be assessed on a property. When you buy a single-family home, for example, the assessed value exists to help you better anticipate how much you’ll need to shell out in taxes each year. Sometimes, this number can have a serious effect on the profitability of a property, and it may even sway you to avoid that property in the first place. First, a government official known as an assessor will determine the value of the property. Then, the city or local government’s tax rate is applied to that value to determine how much you will pay in property taxes.
What is Market Value?
Market value is often referred to as “fair market value,” and it determines how much you should reasonably expect to pay for a home. Numerous factors go into determining market value, including appraisals, square footage, location, features, the age of the home, the average market price in the neighborhood, the crime rate, and more. Even the demand for homes in a particular neighborhood can significantly impact the fair market value.
In some cases, tax assessed values can play a role in the market value, too. If the local property taxes are especially high, sellers may feel compelled to reduce the asking price. On the other hand, if they are very low, the demand for homes in that area may drive prices up, instead. To put it as simply as possible, a home’s actual market value is nothing more than the amount of money a buyer is willing to pay.
Do These Values Influence Each Other?
When looking at tax assessed value vs. market value, the two are very different, but they influence each other in several ways. Realtors will often fall back to a home’s assessed value as a benefit of purchasing a home, especially if the assessed value is relatively low compared to the actual market value. Furthermore, when tax assessments are done, the assessors will likely take the market value into consideration.
It’s also important to remember that if you’re planning to renovate a property, that renovation will change the assessed and market values of the home. The market value will change first as a direct result of the improvements made to the home. Later, when the market value has increased, the tax assessor will keep that increase in mind when determining the tax value.
Tax assessed value vs. market value is particularly important to investors. Understanding the differences between the two and the ways in which they influence one another can help you make better and more informed decisions about the properties you buy.