We at WestRock pride ourselves on our accurate and factually detailed appraisal reports to substantiate our final valuation.
There are several values assigned to a residential or commercial property and knowing the difference between these values is key when dealing with real estate.
That’s not to say one value is wrong and the other is right. Each one is useful in distinct situations. The assessed value of a property is important to local governments because it establishes state and local taxes for the real property. Whereas, the appraised value of a property is crucial when buying or selling a property because it reflects the market conditions at the time.
As an informed buyer, seller, or property owner, you’re less likely to be surprised by your tax bill if you know the difference between the sale prices as property owners and the price determined by the tax assessor.
To make this distinction more clear, we’ll go through how each value is arrived at, what factors are taken into consideration, and what situation is most appropriate for each valuation.
Property Appraisals
An appraisal is an independent valuation, commissioned by an investor or potential investor in that property. There are several instances in which an appraisal is necessary:
- Selling a property
- Buying a property
- Refinancing a property
- Disputing an existing assessment for tax purposes
- Valuing a property as part of a decedent’s estate’s holdings
Even when an appraisal is conducted on a property, take single-family homes for instance, another appraisal may be conducted to verify or even dispute the market value of the property.
In these cases, real estate appraisals are used to set or challenge a price on that property. The reason a property owner does not just use the sticker price for which they bought the house originally is because of ever-changing market values.
Fair market value is the price someone sets a property for and the price another party agrees to purchase it. This price is subject to many circumstantial factors that are too unique to be applicable to any other property.
Market value is defined in the Appraisal Institute’s Dictionary of Real Estate (4th ed., 2002) as: The most probable price which a property would bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of the sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
A) Buyer and seller are typically motivated;
B) Both parties are well informed or well advised, and acting in what they consider their best
interests;
C) A reasonable time is allowed for exposure in the open market;
D) Payment is made in terms of cash and U.S. dollars or in terms of financial arrangements
comparable thereto; and
E) The price represents the normal consideration for the property sold unaffected by special or
creative financing or sales concessions granted by anyone associated with the sale.
That’s why real estate appraisers look at the property itself but also focus heavily on similar properties which convey in the market. Through the review of comparable property sales as well as an analysis of an income-producing property's upside income potential and projected net operating income, the real estate appraiser determines the property’s valuation and presents it in an appraisal report.
The key is independent, state-licensed appraisers who provide credible real estate appraisals. A lending institution may require an appraisal if a party is using a mortgage to purchase or refinance the property. If that’s the case, the lending institution will not lend over the independently appraised valuation of the property.
The appraisal scope of work and required analysis can vary between different kinds of properties, such as commercial and residential real estate. If an appraiser was valuing a commercial or industrial property, more emphasis may be placed on the income potential for an income-producing property. For a special-use property, the appraiser's use of the Cost Approach valuation methodology may provide the most insightful indication of market value by deriving the value of the subject land as well as the depreciated value of the building improvements. For owner-occupied residential or commercial/industrial buildings, the appraiser's development of the Sale Comparison Approach valuation methodology frequently provides the best indication of market value. To summarize the Income, Cost, and Sales Comparison valuation methodologies further, please review the following:
The income approach values the potential income a property can generate and estimates a valuation based on those factors. The production of income, minus potential losses (taxes, vacancy, expenses, etc.), capitalized by a market-derived overall capitalization rate contributes to the valuation of commercial real estate.
The cost approach generates a value based on the price it would take to build a comparable property. Generally, that considers land and construction costs and entrepreneurial incentives and is only relevant in special-use properties or relatively new property types.
The sales comparison approach involves direct comparisons between the subject property
and similar properties that have been sold in the same or in similar markets, in order to derive
a market value indication. The approach represents an interpretation of the actions of buyers,
sellers, and investors in the market, and is based upon the principle of substitution, which
holds that a prudent person will not pay more to buy a property than it will cost to buy a
comparable substitute property. The price paid for a property is usually the result of an
extensive shopping process in which available alternatives are compared, based upon the
buyer’s purchase criteria. When a sufficient number of similar property purchases are made in
the current market, the resulting pattern usually provides a good indication of market value.
Any independent property appraisal may involve either of these approaches or a combination of the three, depending on the type of property and which method is appropriate.
Property Assessments
Comparatively, a property’s tax-assessed value is the dollar value assigned to a property by a government-assigned assessor for the purposes of determining property taxes. The assessed value is usually a percentage of the property's fair market value, which is the price that the property would fetch if it were sold on the open market. The assessed value is used to calculate the property taxes that the owner will be required to pay. Assessed values for real estate tax purposes are often derived using mass appraisal techniques. Mass appraisal is a process used by local government assessors to determine the value of a large number of properties in a consistent and efficient manner.
Mass appraisal techniques involve analyzing various factors such as property characteristics, market data, and sales trends to estimate the value of individual properties. Assessors typically use computer-assisted appraisal models that take into account factors such as location, size, age, condition, and comparable sales in the area.
These models allow assessors to establish assessed values for properties in a fair and uniform manner, ensuring that similar properties are assessed similarly for tax purposes. Mass appraisal techniques are especially useful in assessing values for residential, commercial, and industrial properties in large jurisdictions where it would be impractical to individually appraise each property.
It's important to note that while mass appraisal techniques provide a systematic approach to determining property values, they may not always reflect the exact market value of a specific property. Property owners can often challenge assessed values if they believe they are inaccurate or unfair.
These taxes are used to fund a myriad of public works: schools, roads, police, sanitation departments, and many more. Property tax rates differ from state to state and are determined by annual tax assessments. They are kept separate from annual personal property taxes on items like cars, inventory, and equipment.
Both personal property and real estate property are considered taxable property. Assessors are then required to determine the amount owed in taxes by assigning a property value to real estate.
The Effects on Property Value
An annual property assessment can change your annual taxes because you pay a certain percentage of the valuation in taxes. Though there is no crossover between the two, you may conduct an independent appraisal of a property and use it as evidence if you wish to dispute your property tax valuation through the legal process of tax certiorari. This allows you to challenge the assessment of a property with an independent appraisal of your own through the appropriate legal channels.
When an independent appraisal is conducted, that valuation can be used to determine or negotiate the taxes on the appraised property by following the specific municipal guidelines in protesting your real estate taxes. Were you to request an independent appraisal, those findings could have a bearing on your property’s taxes.
Please note that the assessment applied by a local assessor may have limited relevance to the estimated market value of a residential or commercial property as determined by a real estate appraiser. Though the valuation processes use similar data, documents, and information, they frequently arrive at different market value conclusions. These variations in value are frequently attributed to the mass appraisal technique utilized by local assessors to value hundreds, if not thousands of varying property types within a given municipality compared to the depth of appraisal analysis applied by professional real estate appraisers for a given individual property.
Important Differences Between the Two
Assessed values and fair market values are ultimately determined for different purposes and frequently result in different value conclusions. A real estate appraisal conducted by a professional licensed appraiser is used by active market participants to ascertain a property's fair market value whereas an assessment is exclusively utilized for real estate tax purposes and is not subject to the same depth of valuation analysis that is applied by professional real estate appraisers.
Should you wish to dispute your property’s assessed value, tax certiorari is a legal avenue open to you but will require you to commission an independent appraisal.
The Bottom Line
An imperative difference between fair market value and assessed value is not just the purposes for which they are conducted, but who performs them. A real estate appraisal can only be completed by an independent licensed appraiser while an assessment is derived by a local tax assessor utilizing mass appraisal techniques. In many jurisdictions, assessors are not required to be licensed appraisers. Assessors and licensed appraisers perform different roles and have different responsibilities.
Assessors are government officials who determine the assessed value of properties for taxation purposes. Their focus is on establishing values that are fair and uniform across a large number of properties in their jurisdiction. They often use mass appraisal techniques, as mentioned earlier, to determine property values.
Licensed appraisers, on the other hand, are professionals who provide independent, unbiased opinions of value for specific properties. They are typically engaged by individuals, organizations, or financial institutions for purposes such as buying or selling real estate, obtaining a mortgage, or settling an estate. Licensed appraisers often have to meet specific education, experience, and examination requirements set by their respective licensing authorities.
While assessors are not usually required to be licensed appraisers, they may have relevant qualifications, training, or certifications specific to assessment practices. These qualifications can vary depending on the jurisdiction and the requirements set by the governing authorities.
It's important to note that the requirements and qualifications for assessors and licensed appraisers can vary significantly between different regions, so it's advisable to check the specific regulations and requirements in your local jurisdiction.
You’ll have no need for hiring a property assessor but the same cannot be said for a real estate appraiser. Whether you’re trying to sell a property and not sure what asking price to set, or unsure whether you’re paying too much for a property, an appraisal can benefit you.
Next Steps
The most important aspect of a real estate appraisal is to find an appraiser that is reliable, transparent, and has the experience to back up their findings. We at WestRock pride ourselves on our accurate and factually detailed appraisal reports to substantiate our final valuation.
If you find yourself in need of an appraiser, fill out this form to contact WestRock to answer any questions you may have and begin the appraisal process.
