Assessed Value vs. Market Value

This newsletter will discuss the correlation, or lack of correlation, between the assessed value of a home and its market value. There is much buyer confusion when a home is on the market at an asking price that is quite different from the assessed value - this newsletter will explain the apparent disparity.

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.

If you would like an estimate of what your home would sell for in today's market I would be more than happy to come by, have a look at your home, and then provide a CMA (comparative market analysis) which will provide you with an estimate of what your home should sell for, along with a marketing plan to get maximum exposure for your home.

If you have any questions about any of this then please don't hesitate to reach out to one of us. We would be more than happy to help.