Whether you’re a buyer or a seller in NYC, it’s essential to understand the distinction between appraised value and assessed value. You may think that purchase price is the main — or only — value that matters when it comes to sizing up a home, but you’d be wrong. And you may think that appraised and assessed value are the same, yet they couldn’t be more different. Let’s explore the differences.
What Is Appraised Value?
A property’s appraised value will matter greatly if you’re considering any of the following:
- Buying a property
- Selling a property
- Refinancing a property or getting a home equity loan
As a Buyer
If you’re buying a property and taking out a mortgage, an appraisal is required by your lender. That’s because the lender needs to make sure the property is actually worth the price being paid for it, based on an analysis of recent closings of similar property types, or what is known as a “comp” (for “comparable”). Also, an appraisal helps protect the lender (or the institution that buys the loan) in case you stop making your monthly mortgage payments. It ensures the property will act as collateral that the bank can repossess and sell should they need to enforce the terms of the loan. Sounds scary, but hopefully you never find yourself in this position.
What if the bank’s appraised value comes in lower than the purchase price? It’s possible you might not get your mortgage, which means you won’t be able to close on the property you want to buy. There are different courses of action you can take should this occur, like putting more money down. But more often than not, when the appraised value comes back lower than the sales price, it has the potential to kill the deal. Therefore, it’s always important for brokers to make sure the appraiser has all the appropriate information related to comps to help inform the appraised value.
Appraisers are chosen at random by the banks issuing the loan and will generally appraise the property within a week of the loan application being submitted. This cost is paid by the buyer.
As a Seller
If you’re selling your property, you want nothing getting in the way of the closing. Waiting for the results of the appraisal can sometimes feel like a nail-biter, particularly if you’ve pushed the market on the sales price. Prices are continuously increasing in NYC, so it’s no surprise that sellers will try to see how much they can get. While getting the contract signed is the first challenge to overcome, the second hurdle is getting the appraised value to match or even surpass the asking price. Ideally, as a seller, you’ll never have to deal with receiving an appraisal that comes in lower than the sales price. However, if it does happen, speak with your broker and lawyer immediately to help identify ways to still get the sale done.
When Refinancing or a Getting Home Equity Loan
If you own property, you may be interested in refinancing to get a loan with better terms. Since the act of refinancing involves a bank paying off your existing loan and then issuing you a new one, the risk is shifted from your original lender to your new lender (or the same lender if you refinance with the same bank). Because of this transfer in risk, ensuring the property is actually worth the value you claim is essential. The same can be said for taking out a home equity loan, whereby you want to borrow cash against the equity you’ve built up in your home. Again, the right appraised value will be necessary in helping ensure that you get this type of loan.
What Is Assessed Value?
While appraised values run closer in line with sales prices, assessed values are used by the New York City Department of Finance to price respective property taxes. Every property is taxed on a quarterly basis by the city. The way taxes are calculated is by taking the assessed value and multiplying it by the property tax rate.
Assessed values will seem significantly more arbitrary than appraised values. For instance, you may find a $1,000,000 apartment in Battery Park City with an assessed value of $258,000. This has no impact on the sales price or the appraisal, but is rather a reflection of how the city values properties for the purposes of transactions. Just because the assessed value is low doesn’t mean you have a case in submitting a lowball offer, since sales prices and assessed values are not the same.
Assessed values will generally move directionally with appraised values. As NYC sales prices have increased, so have assessed values. Property owners, as well as buyers, don’t like the increase in assessed values, as it means their quarterly tax bill increases. Over the past several years, there’s been a lot of concern about assessed values creeping up more rapidly than they ever have before, as taxing real estate is the city’s easiest way to increase revenue and decrease budget deficits.
Updated property value assessments are issued by NYC on an annual basis, and since increased assessments are disliked by everyone, many buildings attempt to fight them in court. It’s a fight that condos and co-ops generally lose, unfortunately. Increased assessments may sometimes be so detrimental that it encourages owners to sell. Also, high property taxes often keep would-be buyers from purchasing certain properties, as the monthlies are unbearable.
Summary
Appraised values and assessed values are completely different, but equally important to know about. While the appraised value may be much more pertinent to any given buyer or seller, it is the assessed value which will have direct, variable influence on one’s monthly home ownership expenses. New York City is the most dynamic real estate market in the world, and one thing you can almost always count on is higher prices and higher taxes.
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