Time after time in our recent market, real estate agents have heard the words, ". . . but our house appraised for $$$ last year." Those words are not just a reflection of the decline in property values, but can also be a reflection of the difference between appraised value and market value. Confusion is compounded when an astute home seller notes, " . . . but my Saint Paul real estate taxes gave the value as $$$". Once again, the difference is not just because property has lost value but can be a difference between the assessed value and the market value of the house.
Here are three important definitions relating to real estate value.
- Assessed Value - the dollar value assigned to real estate for the purpose of collecting taxes
- Appraised Value - the dollar value assigned to real estate to make sure the lender has enough collateral to justify the mortgage amount
- Market Value - the dollar value a ready, willing, and able (loan worthy) buyer is willing to pay for the property
When any market changes drastically like the real estate market has, it is difficult for the assessed value to keep up with the market values. Assessed values are sometimes confined by regulation limiting the change that can be made each year. As a result, assessed values may be lower than market values when market values are increasing and higher when market values are decreasing. Assessed values are not used in St. Paul to determine the amount for which a home should be listed. The two values are usually not comparable.
Appraised values are determined by appraisers who have a copy of the purchase agreement and know what the "target" value is. There are specific guidelines appraisers must use in determining the safety of the bank's loan for the property. In the case of FHA and VA loans, there are specific guidelines as to the condition of the property as well. Because appraised values for homes are usually based on recent sales, they will go up and down just like the prices in the real estate market. An appraised value last year for a home equity loan usually will not be the same value this year. If the market values have gone down, as they have in St. Paul, so will the appraised values.
Market values are gleaned from recent sales in the MLS or in public records usually within the last 4-6 months. Market values are always buyer driven. In the first four years of this century, buyers were willing to pay any price necessary to get a home. Interest rates were low and qualification standards for home loans were lenient. Because many home buyers could qualify for mortgages, there weren't enough houses for everyone. Buyers were willing to outbid their competitors in order to buy that "rare" home. As a result, market values went up.
Today, market values have gone down. Why? Because buyers are no longer willing or able to pay the same high price for a home. Interest rates are still low, but qualification standards for home loans has become stringent. There are fewer home buyers in the market and more homes for sale. Buyers today know there will always be another house that they can buy so they are not willing to pay such high prices. Home buyers today are shopping for the best price and best condition.
Just like there are bear and bull markets in the stock market, there are buyer and seller markets in real estate. Knowing the market is important to determining the value of your home. Always use the market value when listing your home for sale. An appraiser could be hired (note the word hired means for a fee) to determine the market value of your Saint Paul home or you could contact a real estate agent (that's me!) to determine your market value based on the recent sales in your area.