The question Are assessed values and market values the same? is one that both buyers and sellers frequently ask. The simple answer is NO you cannot assume that the assessed value is a good indicator of the market value of a home. Here’s why.
First we should understand what assessed value is – it is a value assigned to a property by the town to calculate property taxes.
Before discussing Assessed value vs Market value it is important to explain the Massachusetts statute called Proposition 2 and 1/2 and how this impacts the assessed values of homes.
Proposition 2 and 1/2 was first passed in 1980 and came into effect in 1982. The component of this statute that impacts assessed value is the limitation of municipalities to raise the total tax revenue collected each year to no more than 2.5% over the prior years total tax revenue. This means that each year a municipality cannot increase the total tax revenue by more than 2.5%.
How this impacts the assessed value of a home is that if a community has experienced significant increase in home values, the municipality cannot increase the assessed value of the existing home base in the community by a comparable amount. If it did, then the property tax revenue collected on the higher assessed value may push the municipality over the 2.5% ceiling threshold imposed by Proposition 2 and 1/2.
This is further impacted if the underlying tax breakdown in a municipality changes. Total tax revenue is the sum of residential real estate property tax, commercial real estate property tax, industrial real estate property tax and business owned personal property tax. An example to describe this is where an entity that is non-taxable – for example, a not-for-profit hospital, church, community foundation, charity sells some land off to developers who build million dollar plus condos on the land. Each time a home is sold, the town is now collecting property tax revenue for it whereas previously it had not, thus the total tax revenue being collected is now being pushed up by changes to the underlying tax base of the town, again making it difficult for the town to increase the assessed value of existing homes to a comparable figure to the market value of the home.
Another factor playing into the dilemma for towns with increasing tax revenues is an active real estate market. When a house is sold, the town adjusts the assessed value of the home to the sold value of the home during the next assessment cycle, so in a town with an active real estate market the town is collecting more tax revenue based on the adjustment of assessed values due to homes selling.
When a home has a low assessed value compared to its market value, the homeowner is very unlikely to contact the town to request them to increase the assessed value of their home as this will result in a higher property tax bill for the homeowner, so this is unlikely to occur.
There is a benefit to buying a home with a low assessed value, and that is the taxes will be less until the town reassesses the home during the next assessment cycle.
The result of all of these factors is that there is NO correlation at all between the assessed value of a home and the market value of a home. Depending on your town the assessed value may appear close to market value, but there is NO exact correlation between the two.
What’s the bottom line – what will I lose if I sell for the Assessed Value?
The answer is A LOT. Looking at the sales in Lexington in 2013 the average difference between the Assessed value and Sale price was 20% – the average home sale price in Lexington is over $800,000 so 20% equates to $160,000!
The details of this post came from The following newsletter Assessed Value vs. Market Value (or if you’re on your smartphone – Assessed Value vs. Market Value)
The MA Properties Online team produce a newsletter on a monthly basis on topic of interest to both buyers and sellers – to see a complete list visit www.mapropertiesonline.com (or if you’re on your smartphone – mobile.mapropertiesonline.com) and look under the Newsletters tab.
If you have a real estate topic that you think needs more explanation please email me at Marcus Collins and we’ll look into writing a newsletter on the topic in the very near future.