Why Is the Assessed Value of My Home So Much Lower Than What I Paid?

Your home is likely the biggest investment you'll ever make, so you want to know it's a valuable asset.

You'll likely hear about the assessed value versus the market value of a home. It can be confusing to understand the difference and know how those values might impact your financial investment.

What Is the Assessed Value of My Home?

The assessed value of a home is its valuation for property tax purposes. Your property taxes are calculated based on the assessed value. That means if you have a higher assessed value, you'll pay more property taxes. A lower assessed value can be a benefit to you by saving you on property tax payments. Your local tax authority will determine the assessed value at regular intervals, as often as every year.

You can appeal the assessed value of your home if you don't agree with it. However, it's not wise to argue that your home is worth more than the assessed value, as you'll see an increase in your property taxes. The people who usually fight the assessed value are the homeowners who want it lowered to decrease what they owe in property taxes.

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How Is It Determined?

A local tax assessor will assign the assessed value to your home based on a variety of factors. The process can vary in different areas. Many of them use the market value of the home as a determining factor, although they're not typically the same number. The assessed value is usually a percentage of the market value. The percentage of the market value often varies depending on the location, but is generally consistent across all properties in a given locale, regardless of price point. For example, if an assessed value in a particular location is 50% of market value, this 50% will usually be applied to all homes in the same area.

The location and value of similar homes can affect the assessed value. The assessor will also consider the condition of the home and any improvements you've made to the home, such as additions or major renovations. Some assessors go to the home to collect data, but many use real estate data and computerized programs to come up with the value.

How Is That Different Than Market Value?

Market value can be more important than the assessed value if you're considering selling your house. The market value is an estimate of what your home could sell for in the current real estate market and is typically higher than the assessed value. In other words, it's what a buyer would be willing to pay. Market value is used to set the price when you sell your home. It's typically the number lenders use when making loan decisions, including how much money they'll lend the buyer for the home.

Why Is the Assessed Value Lower Than What I Paid for My House?

Your assessed value is typically lower than the market value for your home. That means you can expect your assessed value to be less than what you paid to buy the house, especially if you just recently bought your home. The market value of your home can fluctuate significantly and frequently since the real estate market changes regularly. If your assessed value is a lot lower than what you paid, it benefits you by saving on your property taxes. You can often sell your home for much higher than the assessed value, depending on the current real estate market conditions. If the assessed value is higher than what you paid and the real estate market hasn’t changed significantly since your purchase, you may consider appealing.

How Do Assessed Value and Market Value Relate?

The market value often helps determine the assessed value of the home, especially in areas that use a percentage of the market value for taxation purposes. If the market value increases, the assessed value could also increase. However, some areas cap how much the assessed value can increase each year to prevent a huge increase in property taxes if the real estate market suddenly booms. Some of the same factors can help decide both the assessed and market values of your home, including the size, neighborhood, improvements you've done and values of nearby homes.