Throughout the course of performing several closings recently, many customers have had difficulty trying to distinguish between 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 concepts, for in this economic climate, the distinctions between the three can be rather confusing.
(It is important to note that while most of the details regarding this discussion relate to properties located within Jefferson County, Kentucky, the concepts can be generally applied to properties throughout the Commonwealth).
First, let’s look at the general definitions of fair market value, or “FMV”, and appraised value in today’s economic climate, because while these two concepts in particular are somewhat similar, there are some important distinctions between the two. Fair market value 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 most competitive price a buyer is willing to pay - and the lowest price a seller would be willing to accept - for a particular piece of real property. This idea is tied to the basic economic notion of supply and demand … if there are only a few properties for sale in a particularly desirable area, a property's market value will go up because the price a typical buyer is willing to pay will increase due to demand.
However, this concept differs from a home's "appraised value", in that an appraised value is the value of a parcel of real property in the opinion of a single qualified appraiser. Appraisals can be sought by a private entity 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 financial transaction. During the mortgage underwriting process, a lender will rely upon the independent valuation methods of an appraiser to assess a value upon a parcel of property. In fact, along with your credit score and income, an appraisal is one of the most critical elements involved: it allows lenders to justify the amount of the loan sought by the borrower, or, if the appraised value is too low, the loan can be rejected 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, as this is a contingency in most purchase contracts that allows buyers to back out of deals altogether. It should be noted that the appraised value of a piece of property is simply one person’s interpretation of the property’s value, so that figure can change from appraiser to appraiser. So a property's appraised value should never be held to be “gospel truth”. Also, keep in mind that your appraisal is private and confidential, in that you are under no obligation or duty to share the results of this analysis with anyone - including the government for tax assessment purposes.
Now, both of these concepts differ from a parcel's "assessed value." It is the duty of the local property valuation administrator (“PVA”) to discover, list and "assess" a value to all properties within a particular county, and there is a different PVA office for each of the 120 counties throughout the Commonwealth. There is one primary purpose for this valuation, and that is for the determination of property taxes on an annual basis. In Jefferson County, all valid sales are compiled regularly and entered into what is known as a computer-assisted mass appraisal system, or "CAMA", and the purpose of CAMA is to attempt to modernize and streamline the valuation process into the 21st century. This system gathers the general characteristics of each property in the county (such as the property location, lot size, square footage of improvements, etc.), performs a basic sketch of the structure on the parcel (if applicable), and photographs it for analysis. Often times, a property’s assessed value is based upon the price that a parcel of property was sold for within the previous year … so if you have paid $150,000 for your new home, the assessed value is usually going to be that amount at least for the first 2 to 4 years. This is also a public figure, in that anyone has access to this valuation should they know where to look for it.
I realize 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.