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Fair Market Value, Appraised Value, Assessed Value and Replacement Value: What is My House Worth??!?

As a real estate agent in Connecticut, I am intimately involved with home values as a part of my every day activities. It always excites me when people start talking about the value of homes in the Connecticut real estate market. This is a topic where I can add real value to the conversation and who doesn’t like it when that happens!

In order, to properly understand what a house is worth, you need to understand the difference between four different values.

  1. Fair Market Value
  2. Appraised Value
  3. Assessed Value
  4. Replacement Value

Why would there be four different values on your home? Well, like just about everything in this world it’s more complicated then you might think. In order to properly answer the question what is my house worth, you first need to ask yourself for what purpose do you need your homes value.

Your home is one of your most important assets, you should be protected in the event you need to rebuild

Lets start with replacement value because it is probably the most simple of them. Replacement value or more appropriately stated as replacement cost is how much money it would cost to completely rebuild your home. This includes everything including the structure, systems, appliances and finishes of your home. What this value does not include is the land that the home sits on.

So when would you want to know the replacement cost of your home? Typically, it is for insurance purposes. When you insure your homes replacement cost, in the event of massive damage to your home such as a fire, the insurance company will pay to bring the home back up to the condition it was before the damaging event.

Insuring your home with this option ensures you are protected but there are some risks associated with it. For example, ensure the policy adjusts for inflation of home prices or construction costs because you don’t want to be left short changed.

For your own protection, it makes sense to review your options with your insurance professional before making any decisions on the appropriate way to insure your home.

Determining the appraised value of your home is a job best left to the pro’s. Actually it has to be done by a professional!

Next, lets walk through appraised value of your house. A Connecticut licensed appraiser must complete a pretty extensive set of prerequisites in order to become credentialed by the state to put an appraised value on your home. Not only do they have to pass an examination, they also have to have formal appraisal education and appraisal experience as well as recently adding a bachelors degree requirement.

Once they have their license, they typically are hired by the bank that is providing a mortgage for a buyer or a current homeowner who is refinancing. They are an independent party that is contracted to put a value on your home and will receive no benefit if the value coming in one way or the other.

Although not illegal in any way, one could question the ethics of an appraiser who is also the real estate agent and benefits directly from the home’s value coming in at a certain point.

The appraised value is extremely important in real estate transactions. As I was saying about most appraisers are hired by banks who are providing mortgages on houses that are under contract and hopefully selling soon. The bank doesn’t want to lend money against a home that isn’t worth a certain percentage of the loan.

For example, say a buyer is under contact for a home for sale in South Windsor Connecticut for $300,000. They are trying to get a mortgage and the bank requires 10% or $30,0000. The bank’s terms are if they are going to lend $270,000 then they want to ensure that their money is loaned against a property who’s value can support the price.

If the appraisal value doesn’t come in at or above $300,000 then they may not approve the loan and the deal could fall apart. This happens quite more often than you think and is very frustrating for those involved, especially when the appraisal comes in short by only a small amount.

One example of the way the housing market keeps itself in check

So if the value of a house is determined by an appraiser, wouldn’t that mean it is the fair market value as well? While this would seem logical, it is actually not the case all the time. Lets dig a little deeper.

First off, what is fair market value?

As you can see from the above definition, fair market value is a price for an item, in this case a house, to which a buyer and a seller can agree. Nowhere, does it mention an appraiser!

This is where real estate complicates what seems to be pretty straight forward definition. So an appraiser gets an order to perform an appraisal on a home that just went under contract in Manchester Connecticut. He notices that the purchase price of the home is for $390,000 but the neighborhood is filled with cape’s built in the 50’s that are selling for at most $200,000. What makes this house worth almost 2x what the comparable homes are selling for in the area? As you can imagine a bank would ask the same question.

Now upon further investigation, maybe this home has unique qualities such as recently being zoned business and is able to be sold to a developer for commercial development. Or maybe the buyer and the seller are running a scam.

This is one way the real estate market keeps itself in check and ensures fair market value and appraised value usually go hand in hand, but not always. There is always human error that could of thrown off the value or emotional value that could be derived from the home for one particular buyer.

Don’t forget about taxes, you know the town won’t forget!

Finally, we have a value that most people don’t typically think of when discussing what is my house worth. That is assessed value and it’s primary purpose is to tax you! In Connecticut, your homes assessed value is 70% of the appraised value that the town put on your home by an appraiser.

That value is then multiplied by the mill rate to determine the amount you owe the town for owning a piece of property there and taking advantages of all the services town has to offer. If you have kids in school, I feel the taxes you pay are a bargain because of the value you get from not paying for private education. This of course is assuming you are happy with the education the town is providing.

I’ve heard this spun a couple different ways. I have heard people say that we are lucky that Connecticut is only charging us 70 cents on the dollar for real estate taxes. So in my opinion, yes, that is true but the town is going to get the money it needs one way or the other. If they need more money they try to raise the mill rate to get more revenue.

Summary about different types of house values

Ultimately if you are trying to buy or sell a home you will want to understand all these different types of values of your home because they each represent a critical value for the process. To summarize, when buying or selling the price that will be negotiated into a binding contract is the fair market value. However, when dependent on a mortgage you will most likely also need to know the appraised value. In order to understand how much your taxes will be the assessed value is what you need to get. Lastly in order to appropriately insure your home in Connecticut you need to understand the replacement value or cost.

All of this can be confusing and hopefully I have made that easy to understand and answers all your questions. Still have a piece of information missing from what you need to know? Feel free to reach out and get in touch with Kris Lippi for help with any and all your real estate related questions.

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About the Author: The above real estate information on Fair Market Value, Appraised Value, Assessed Value and Replacement Value – What Is My House Worth??!? was provided by Kris Lippi, a local Connecticut real estate agent serving Hartford and Tolland Counties.

Are you currently thinking about selling your home? I have an awesome marketing plan that focuses on what works to sell your home! Contact Kris Lippi for a no obligation discussion, call or text 860-930-1371.

Kris Lippi services real estate sales in the following Hartford and Tolland County towns: Andover, Avon, Berlin, Bloomfield, Bolton, Bristol, Burlington, Canton, Columbia, Coventry, East Granby, East Hartford, East Windsor, Ellington, Enfield, Farmington, Glastonbury, Granby, Hartland, Hartford, Hebron, Manchester, Mansfield, Marlborough, New Britain, Newington, Plainville, Rocky Hill, Simsbury, Somers, South Windsor, Southington, Stafford, Suffield, Tolland, Union, Vernon, West Hartford, Wethersfield, Willington, Windsor, Windsor Locks Connecticut

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