Throughout the course of performing several closings recently, many customers have had difficulty trying to distinguish the concepts of “fair market value”, “appraised value” and “assessed value” as they relate to their home.  So to assist them (and you), I will try to explain the differences between these three values - in as simple terms as possible - due to the fact that the concepts and their distinctions can be rather confusing (keep in mind that most of the details regarding these concepts relate to properties located within Jefferson County, Kentucky, but can be generally applied to properties throughout the Commonwealth).

First, let’s look at what the general definition of both fair market value (“FMV”) and appraised value in today’s economic climate, because while they are somewhat similar, because while they are somewhat similar, there are some important distinctions between the two concepts.  The most universally accepted definition is the most probable price that a particular parcel of property should sell for in both a competitive and open market with all conditions for that market being met by the property itself, such as the buyer and seller acting on their own and the price not being affected by any undue outside stimulus.  Simplifying this concept even further, it is the highest price a buyer is willing to pay and the lowest price a seller is willing to accept on a particular piece of property.  This is tied to the basic economic concept of supply and demand … if there are several properties for sale in a particular area of town, the price a buyer is willing to pay and the amount the seller is willing to sell it for will decrease, which is where we find ourselves while in the midst of the economic climate.  So clearly, we are in the midst of a buyer’s market, which has depressed the FMV of most properties throughout this area.  It is important to note, though, that the FMV is often not the price the property in question for which it could have been sold, but the price the property of which it actually was sold.

The widely accepted definition of appraised value, however, is the value of a parcel of real property in the opinion of a single qualified appraiser.  These can be sought by a private individual for any reason, perhaps due to the general curiosity of the homeowner to determine the amount of equity in their home at that time, but it is usually sought by lenders in the course of determining the viability of a particular transaction.  When obtaining a mortgage through a lender, they rely upon the valuation methods of an appraiser to assess a monetary value for the specific piece of real property on which a loan will be secured. This allows the lender either to justify the amount of the loan sought by the borrower (if it is high) or reject the loan amount that the borrower is seeking outright because there might not be enough collateral available for the lender’s comfort.  A low appraised value can also obviously affect a buyer's ability to purchase a parcel of property in the first place if the appraised value does not meet or exceed the contract price.  Unless the buyer can come up with additional funds to purchase the home, that buyer will unlikely be able to qualify for the loan.  It is important to note that the appraised value of a piece of property is simply one person’s interpretation of the property’s appraised value, so that amount can chance from appraiser to appraiser.  So one person’s appraised value should never be held to be “gospel truth”.

The basic difference between FMV and appraised value can be easily explained with the above explanations of each concept. The FMV of a home is the price a typical buyer in the market is willing to pay for the property in question, while the appraised value is an unbiased, independent valuation of the property once that individual has completed their overall inspection on the property.

Now, both of these concepts differ greatly from the assessed value of a parcel of property.  The local property valuation administrator (“PVA”) duty is to discover, list and value all properties within that particular county, and there is a different PVA’s office for each of the 120 counties throughout the Commonwealth.  This valuation is done to determine how much taxes are due annually to the proper entity in charge of collecting these taxes.  Property that is not exempt from taxation shall be assessed for taxation purposes at its fair cash value, which is the estimate of the price the property would bring at a fair and voluntary sale.  In Jefferson County alone, there are several trained individuals in the PVA’s office that review, on average, over 32,000 transfers of residential properties to search for valid, arm’s-length sales.  This office gathers each property general characteristics, perform a basic sketch of the structure itself on the property, and photograph it for their analysis.  Often times, a property’s assessed value is based upon the price that a parcel of property was sold for in the previous year … so if you have paid $150,000 for your new home, the assessed value is usually going to be that exact amount, at least for the first few years.  The PVA then takes that value and applies a tax rate to it that can vary between 1.2601 and .9935, depending upon the part of the city in which the home is located.  This varies from year to year, so you should keep constant tabs on what these tax rates are annually.

The difference between the assessed value of the property and its FMV or appraised value is that the assessed value can be appealed by the homeowner if they feel that the assessed value determined by the PVA is too high.  A conference is held between a representative of the Jefferson County PVA’s office and the homeowner and this period in which to file an appeal begins on the first Monday in May every year and is open for thirteen days, including Saturdays. The actual dates for such an appeal are published in The Courier Journal (the local newspaper) and are also noted on the annual assessment notice, which is a blue form often delivered to the homeowner at the beginning of the year. Homeowners should bring sufficient documentation to this conference that substantiates their opinion of the property’s assessed value, such as a recent appraisal, photos, current real estate listings, or any other sales information from their particular neighborhood.  Should the homeowner be successful in challenging the assessed value, thereby reducing it in the PVA records, it would decrease the total amount of taxes due annually on the property. 

I am know that these three concepts can be rather difficult to comprehend, so if you would like a further explanation of anything covered in this article, please contact me at 502.893.3336 and I would be more than happy to discuss these items with you.