Property taxes can be a big consideration when deciding to buy a house. Other than your mortgage, they can be the largest home-related expense you pay each year. Property taxes are typically based on a house’s tax assessed value, which can cause some confusion.
Current homeowners might be upset to see that their tax-assessed value is much lower than they think their home is worth. Buyers could wonder why there’s a wide gap between the home’s tax assessed and fair market value.
Here is what those numbers truly mean and how they can impact both buyers and sellers in a real estate transaction.
What is Tax-Assessed Value?
Tax-assessed value is the amount that the county assessor believes your home is worth. Your property taxes are based on this value. But it often can have little to do with your home’s fair market value.
The county needs to collect enough tax revenues to cover its budget. When the assessor looks at houses, they keep this number in mind. To determine your home’s value they might consider recent sales in your area, any improvements you’ve made to the property, and its replacement cost.
Once the assessor has a value, they calculate the tax assessed value. You’re only charged property taxes on a certain percentage of your home’s value. If the assessor thinks your home is worth $150,000 and the assessment rate is 60%, you’ll only pay taxes on $90,000 of its value.
Because in most states homes are only assessed yearly or every two years, the tax assessed value can lag the home’s market value.
What is Fair Market Value?
The fair market value is what your home is worth to a buyer in a normal, healthy market. The regular housing market is one which isn’t glutted by foreclosures, and the fair market value assumes that your property isn’t distressed.
Fair market value takes into consideration your home’s age and condition, the prices that similar homes in your area have sold for, and your location. Both your home’s interior and exterior can be a factor, and supply and demand in your neighborhood come into play.
The good news is that banks look at the fair market value when deciding whether or not to grant a mortgage. You won’t have to worry about getting approved for a mortgage if paying more than the tax-assessed value for a home.
Why do These Numbers Matter?
The tax-assessed value matters because it will impact how much you’ll pay in property taxes when you buy a new home. Sellers should know that if their area’s property taxes are much higher than a neighboring town or city it could negatively impact their sale. Your real estate agent will have insight into how you stand versus competing areas.
Often, realtors use these numbers to help sell a house. If the home is listed for less than the tax assessed value they’ll tell buyers that they’re getting a deal. Given that these numbers can often be wildly different this isn’t really the case.
Buyers, however, can use the tax assessed value in negotiations if the list price is much higher. It can help them negotiate for a lower price if they ask the seller to justify the differences.
Improving Fair Market Value without Raising Taxes
When it’s time to sell you want to get the most for your property, which means raising its fair market value. But you don’t want your taxes to go up at the same time!
The easiest way to improve your home’s fair market value without impacting the tax assessed value is to wait to make improvements. Sometime between January and March your city will send out property tax information with your current and next year’s tax-assessed value. Once you’ve received that notification you’ll know that the year’s assessments are done.
At that point, you can make any improvements, particularly exterior touch-ups, prior to listing your home for sale. They will increase your home’s fair-market value, but since the tax-assessed value has already been established, you don’t have to worry about increasing your tax burden.
In some cities, the tax-assessed value is only determined by the home’s exterior. A quick search on the county assessor’s website will tell you their assessment methods. If this applies to you, feel free to make interior improvements that could raise your home’s value.
A Clever Partner Agent can help both buyers and sellers get a fair deal no matter what the assessed and fair-market values are. If it’s time to buy or sell a house, reach out to Clever to get connected with an agent in your area today.