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4 Jan

Appraised Value vs Assessed Value

General

Posted by: Brent Batten

So you’ve heard the terms before and like a lot of people probably thought they meant the same thing. In a way they are both determining a value for your property, but that’s where the similarities end. So what do they really mean?

Assessed Value is the value that the municipal or provincial government has assigned to your property. They use that amount as a way of determining your property taxes, so it’s a very important number. They come up with that number by using a model that consists of comparisons to other similar properties, the current real estate market, and any extenuating issues or circumstances with your property. In BC, you can search your property value using the BC Assessment site, located here. Every January 1st, the value of your property is updated and you have until January 31st to appeal the value. Now why would you want to appeal? Simple, to keep your property tax low. Will you be successful, hard to say. You would need a really compelling argument and supporting information to keep your assessed value low.

In an interesting turn, a gentlemen in Vancouver was successful in arguing that his assessed value was too low. That’s right, he went out of his way to ensure that his assessed value was higher by several hundred’s of thousands of dollars. This is an example of someone that doesn’t understand the difference between appraised value and assessed value.

So what is appraised value? This is a number determined by an appraiser to calculate what your property is worth in today’s real estate market. It is not related to taxes, it is simply there to determine if you were to sell your home today, what would it be worth. Generally appraisals are a combination of comparisons to other similar homes, the current market, and a visit to your home to inspect the building quality. The appraised value is the number that your lender and your realtor really care about.

Lenders want to ensure that the home they’re lending money for you to purchase or during a refinance is actually worth the amount you think it is. That’s why an appraisal is a critical part of the lending process. Now with that said, not all purchases require an appraisal, there are computer generated auto valuation algorithms that many lenders use to determine if the price is in line with today’s market. In the case of a refinance, it is almost always a requirement to have a full appraisal done.

The big question we see a lot is what happens if the appraisal is less then the amount I’m purchasing the home for? Well, now you have what’s called an appraisal gap. Here’s an example:

Purchase Price – $600,000
Down Payment – $35,000
Mortgage – $565,000
Appraised Value – $575,000
Appraisal Gap – $25,000

In this case, the lender will assign the appraised value of $575,000 as the purchase price. So now what? You have a contract to buy that property for $600,000. So here’s what happens now:

Purchase Price – $600,000
Maximum Value – $575,000
Maximum Mortgage – $542,500
Down Payment – $32,500
Additional Cash to Close – $25,000

You’ll now be responsible for coming up with the additional $25,000 if you’d like to close on that purchase. Hopefully you listened to your mortgage broker, and included a subject to financing in your offer, so you have a way out of the purchase should this happen!

As you can see, it’s important to know the difference between assessed value, appraised value, and what happens if there is an appraisal gap.