The value of a home has a significant impact, not only on how much the home is sold for but also on how entities like the government treat the house. Assessment value or assessed value is an important consideration, especially for local governments, which often assess houses at the beginning of each year. Assessments give them important information about property owners and the real estate market they can use to make tax decisions.
An assessment is a study of how much a home is worth. A property assessor goes through a specific process to create this assessment, matching the home with other home prices in the past and present. Since home prices vary widely depending size, features and locations, assessors narrow their studies down to similar houses when deciding value. At least several other houses are examined when assessors make the decision about value.
Governments use the assessment to decide how much property tax to levy against the homeowner, making the assessment a very important process. Governments create an assessment ratio, or a percentage that they use to help average out the taxed amounts. The value of the house per the assessment is multiplied by the assessment ratio, which may range from 60 to 90 percent, depending on the government. This can be confusing, because the value both before and after the ratio has been factored in can be called the assessed or assessment value. The property tax rate, however, is only applied to the value after it has been decreased by the ratio.
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While assessment and market values may be alike, they are rarely identical and may actually be very different. Market values can rise and fall quickly, while assessed values tend to move only once a year and not as sharply. An assessed value may be close to the market value the month it is created, but the market may change so much afterward that a gap appears between the market price, which has risen or fallen, and the old assessed price. This gap can grow large over time.
Assessments vs. Appraisals
An appraisal is not the same as an assessment. Assessments are carried out by professionals working for the government, and their primary purpose is tax-related. Appraisals are done by third parties hired by buyers, sellers and lenders to judge the immediate market value of a home for a mortgage or selling price. They use the same process, but are influenced by different events. The government tends to favor a higher assessed value than the market price, especially in sinking real estate markets, while lenders tend to favor a lower appraised value.