What is the value of a piece of real estate? In a lot of ways, it really does depend on who you ask.

For first-time homeowners, investors, or developers, it’s important to understand what exactly people mean when they talk about the value of a property, and, just as importantly, how this valuation is determined.

In particular, there is one common question that tends to come up with some frequency: Why can there often be such a difference between market value, assessed value, and appraised value for a piece of real estate?

What Is a Home Really Worth?

In many cases, new homeowners are stunned to find that there is a difference – and sometimes a fairly substantial one – between the list price of a home (that is, the asking price of a piece of real estate, as set by the seller and their listing agent), the appraised value of a home, and the tax assessed value of a home. 

And it’s not only a question for new homebuyers, either. In some cases, homeowners or investors may own a piece of property for years, only to be stunned by changes in the tax assessment of their property down the line.

The distinction between these concepts can be crucial to understand! After all, as Amy Fontinelle of Investopedia points out, property taxes are “a significant expense for homeowners, year in and year out,” since “even after you’ve paid off your mortgage, property taxes remain.”

It’s important to get a handle on these different methods for determining the value of a home as early as you can, so that you can budget appropriately, and prepare more completely for the full scope of your financial future. Let’s explore the differences between a property’s tax assessed value and its appraised value. 

Tax Assessed Value

What you pay regularly in property taxes is determined by a number of key factors, chief among them the tax assessed value of your property. So, assessed value might be thought of as the value of a residence, as determined for tax purposes.

The tax assessed value of a home or piece of property – it could be a commercial property, an undeveloped property, or even a vacant lot – is determined on a semi-regular basis by government assessors for the city, county, or municipality in which your property is located.

Local tax assessors are responsible for determining the value of properties in a certain jurisdiction. Broadly speaking, assessors use historical data and trends, property information, comparable sales, and a number of other factors to determine the assessed value of a property. This is done on a regular schedule. In our home base of Cook County, Illinois, for example, assessors aim to reevaluate and adjust their assessments of residential property every three years. 

It’s important to recognize that assessed value does not always reflect market value, and is not necessarily a reliable indicator of market value when you’re buying or selling the home. Because this number is only determined every few years, it may lag somewhat behind the current market value of your home. It may also fail to reflect specific characteristics and features that make your property unique. 

Instead, this value is primarily relevant to your local tax authorities, and will determine how much you pay in applicable property taxes on a regular basis, when considered alongside a number of other factors specific to you (including exemptions, the local tax rate, and so on). In many cases, it is possible to appeal a tax assessment if it seems to inaccurately evaluate your property.

Appraised Value

The appraised value of your home is determined by a licensed appraiser, who generally considers not only local real estate data and trends, but also inspects the interior and exterior of your property in order to determine its value. This is a fairly typical part of the homebuying process.

The appraisal process determines a value for the property that is relevant to your mortgage lender. In a nutshell, the goal of determining the appraised value of a property is to help assure a lender that they are making an informed, sound investment when offering a loan. They do not want to be on the hook for lending more than the property is realistically worth.

In some cases, the appraised value of a property could determine whether or not a loan goes through; lenders may not approve a loan if the appraisal falls short of the list price negotiated by the buyer and seller. In cases like this, though, it is often possible to seek out a second appraisal, or to work with the lender to develop a strategy that allows the transaction to carry forward.

Looking Forward

In all, considering these two different methods for determining the value of a property serves as an important reminder of just how complex, and costly, the real estate process can be.

This is particularly true in Chicagoland, where our unique marketplace and our one-of-a-kind real estate, zoning, and tax laws make having the right legal and financial insight all the more important. As an example, 2018 saw many homeowners and businesses in Cook County facing higher-than-anticipated tax bills, due to changing assessments and local tax rates.

In situations such as these, when a deep knowledge of Illinois real estate, finance, and insurance may come into play, it can be reassuring to know that you have a partner on your side. That’s where the Gunderson Law Firm can step in to help. 

Whether you are a couple wanting to buy or build a house, a corporation converting commercial properties to residential, or a developer looking to change the Chicago skyline, the Gunderson Law Firm can assist with a broad range of legal services, including:

  • Residential Real Estate
  • Commercial Real Estate
  • Purchases and Sales
  • 1031 Tax-Free Exchanges
  • Mortgage Conveyancing & Advice
  • Real Estate Litigation
  • Title Insurance
  • Title Examinations & Disputes
  • Asset Protection / Trusts
  • Estate Planning / Wills
  • Property Development
  • Condominium Law
  • Foreclosures
  • …And more

Feeling ready to keep the conversation? Don’t hesitate to give us a call or drop us a line with any questions or to set up your free initial conversation.