Many real estate listings excitedly announce that a particular property is “priced well below it’s assessed value!” as if this were a bargain not to be missed. This made us realize that most people seemed to misunderstand the difference between ‘assessed value’ and ‘market value’ – and why this is very significant for buyers.
There are multiple ways to value a property, and each approach can yield different results. On one hand, market value is what the property could reasonably get in an arm’s length transaction. On the other hand, assessed value is what the city uses to determine an owner’s property taxes.
It may seem counter-intuitive, but it can be better for buyers when the market value – the price that they are paying – is higher than the assessed value.
Real estate taxes are a function of two factors: the assessed value of a property, and the tax rate for the municipality. And the assessed value of a property related less to the market value, than it does the city’s budget.
One assessor privately admitted that some cities work backwards from their expected budget in order to reverse-engineer taxes to cover the budget. In his city, real estate tax rates were $18-20 per $1,000 in the early 1980s, when housing prices were low, and had fallen to about $10 per $1,000 in the 2010s, when housing prices had increased. When asked about this, he admitted, “We mostly just fudged the numbers until something worked. Even though the tax rate has fallen, our budget has increased and the amount we’ve collected each year has gone up as well.”
In addition, even though the tax rate might be uniformly applied across all residential properties in a city, this might result in an undue burden on some less-affluent neighborhoods. One way that cities get around this is to assess properties in poor or transitional neighborhoods at a a lower percentage of their market value. On the other hand, properties in more affluent neighborhoods might see their assessed and market values closer to the same.
However, when the assessed value is greater than the market value, this might suggest that the real estate taxes on a property could be disproportionately high. Let’s assume two properties in the same city with a tax rate of $10 per $1,000, both priced at $300,000 but one is assessed at $200,000 while the other is “priced well below it’s assessed value!” of $400,000. The first property has annual real estate taxes of $2,000 while the second has taxes of $4,000.