Have you ever wondered why the county assessor usually has a different assessed value than your mortgage company? And what about the value that your insurance company provides to you when you request homeowner’s insurance? Most importantly, what about the value that you might be able to sell your home for? These valuations are all utilized for different purposes, and yet they do not ever seem to be the same. So why is that?
Let’s first take the county assessors valuation. The county assessor generally compares similar homes that have sold in your neighborhood from over a year prior to you receiving your actual assessed value. In my opinion, this valuation method, while it might be accurate at the time it is done, could be outdated by the time you receive your tax notification from the County Assessor.
Now let’s look at your home insurance value. One of the largest differences in this valuation is the fact that your insurance company is not including any of the land value. Insurance companies work off something called replacement value. This ultimately estimates what the cost would be to rebuild your home if the home were to perish in a fire. This is called the replacement cost and usually uses an estimated cost per square foot to rebuild the home. That number can sometimes exclude many of the interior contents of the home as well (like window coverings and appliances for example). Again, this replacement cost excludes the value of your land.
Next, let’s review what is involved with an appraisal. This process is generally done when applying for a mortgage and is required by the lender. This valuation method is designed to estimate a home’s current market value by comparing other similar homes that have sold in the nearby neighborhood recently. The appraiser compares recent home sales (within the last six months, preferably), and compares size, condition, age, location, and quality (along with many other attributes) to your home. This method is ultimately an opinion of value by a licensed real estate appraiser. While this method is extremely accurate, it is using a data set from a specified period of time which makes this valuation method time sensitive. In some cases, appraisals can vary drastically.
Lastly, let’s talk about what your home might sell for, which I would ultimately consider the true market value. The reason is because this is ultimately what someone else is willing to pay you for your home. A buyer might be willing to pay you a premium for your home based on their needs or their desires. Additionally, a buyer might be willing to pay you a premium based on what they believe they can do to your home in the future. Of course, there is a general rule in real estate about location, location, location, which can also provide a premium when you sell a home in an extremely desirable location.
On the flipside, a buyer might want to purchase your home at a discount or at a lower value, if they believe or feel that they must invest money into your home to make it safer, updated, nicer, or more functional. Therefore, your sales price could be negatively impacted if your home requires a significant amount of work to make it more up-to-date or to fix needed repairs.
As you can see, these are four very different methods to determine a home’s valuation and can ultimately create very different outcomes. Generally, one value, while it might be similar to another value, does not dictate the other valuation. Meaning, if your home is appraised by your lender for $800K, that once again does not necessarily mean your home can sell for $800K. Nor does that mean you should carry insurance for $800K of replacement value.
With all this being said, I always recommend consulting with your insurance company annually to determine if your insurance coverage is sufficient to replace your home in the event of a catastrophic loss like a fire.
