Texas homeowners have seen incredible turbulence over the past few years. The median price for a Texas home was $390,600 in May 2022, compared to $240,000 three years earlier in 2019. However, that median sales price measures the median price of homes that went on the market and sold to a new buyer.
But what has alarmed many homeowners across the state is how property taxes skyrocket just as sharply. The Texas Tribune quotes the comptroller’s office, “property tax collections have risen more than 20% since 2017.” Both homeowners who have held the same property for years and new homeowners who just purchased property are facing steep property taxes this year. The more you know how the process works and your right to fair property taxes, the better you can control your financial plan.
In this article, we discuss a frequently confusing issue: the difference between your home’s appraised and market value. Then we’ll discuss your home’s appraised value in more detail, why that number matters, and what you can do to make sure your home’s appraised value is fair and accurate.
The Difference Between the Appraised Value and Market Value of a Home: How Market Rates Are Influencing Your Property Tax Bill
Before we dive into the technical differences between your home’s appraised value and market value, it helps to understand how the real estate market impacts your property tax bill. On the surface, the market should only matter if you put your home up for sale or buy a new home. However, market forces can impact your property’s valuation for tax calculations, both directly and indirectly.
For example, neighborhood appeal can impact value. If your home is in a desirable city or neighborhood, that will be reflected by the rise in the value of comparable homes nearby. When calculating what you owe for property taxes, tax appraisal officials factor in this increase.
Even without looking into the difference between the appraised value and market value, which we’ll explore next, these factors show how your property taxes can go up even if you didn’t sell or buy a home.
Related: Texas Property Tax Increases for 2023: What Should You Expect?
What Is the Difference Between the Appraised and Market Value of a House?
How people measure the value of their homes varies based on the context. However, you should know two fundamental values for your home, and they can be different by a wide margin: the appraised value and the market value.
What Is the Appraised Value of a House?
Property assessors in your local tax authority will calculate the value of your home for tax purposes. They multiply this number by your effective tax rate to determine your final property tax bill. For example, if your effective tax rate is 1.60%, the state’s average effective rate, and your home is assessed at $250,000, your tax bill will be $4,000.
Tax assessors can use several different calculations to determine your home’s appraised value, and each local tax body will have its norms and standard processes for different types of properties. Under Texas Tax Code Section 23.01, properties must be assessed at a reasonable market value under then-current market conditions. To adhere to this standard, tax assessors use a database of historical value information, which holds a detailed history of your home’s value. They then consider factors that would raise or lower that value, such as:
- Comparable properties (also called comps) within a set radius that are very similar to your home and have sold recently. For example, if you have a three-bedroom, two-bathroom home, tax assessors would look at the values and recent sales prices of other three-bedroom, two-bathroom homes in your neighborhood. This is where a drastic upswing in the market can impact your home’s value, as houses suddenly selling for 50% more or double the past year’s price will increase your home’s value.
- New amenities and resources in the area, such as playgrounds, roads, and commercial features. Detrimental features, like rezoned land for industrial use, can also be logged and lower your home’s value.
However, tax assessors don’t weigh the more ‘human’ factors that can make prices on the market so turbulent. Your tax-appraised value won’t consider the likelihood of a bidding war on your property or someone making an above-list offer because they love the property. Instead, the assessments must be reasonable and fact-based. It’s worth noting, too, that the county doesn’t assess interior improvements such as kitchen or bathroom renovations.
Tax assessments can be influenced by exemptions, such as the Homestead Exemption. This form of tax relief is reserved for homeowners who treat their property as their primary residence. If you have this exemption, your property’s appraised value cannot increase more than 10% within a given year (aside from any direct improvements you’ve made on the property).
It’s worth noting that this 10% cap can be significant for many homeowners. The market value on your home could increase 100%, so having a homestead cap in place will equate to significant savings in these drastic increases.
Appraisals for a Loan Is a Different Appraisal Type Altogether
At this point, you may be thinking about another time you’ve heard about house appraisals: lenders require third-party appraisals before issuing final approval for a loan amount.
This is another calculation altogether. In this circumstance, an expert appraiser with no ties to the tax authority appraises the property’s value by considering comps, the roof condition, and other factors such as interior conditions to calculate the home’s approximate value. If this number is above the loan amount value, lenders will approve the loan; however, they won’t approve it if the appraised value is too low. You can ignore this type of appraisal when considering your property taxes, unless it’s lower than the county number. In that case, this number can be used in a tax protest.
What Is the Market Value of a House?
The market value of a house is the amount buyers are willing to pay for your home on the open market. Experts and legal authorities will stipulate that this means what your home would sell for “under normal conditions.” Those “normal conditions” simply mean that you, as the seller, aren’t facing external pressures like moving quickly for a job or selling a house after the death of a family. The housing market over the past few years — while certainly abnormal — is still considered normal conditions. Some of the factors that determine the market value of your home include the following:
- Inventory of homes in your area: High demand can change the market value of your home, even with no other changes.
- Bidding wars or buyers who love your home: Emotions are part of routine house market forces. Someone who loves your home may offer far more than a disinterested third party.
- Improvements: New countertops, a backyard pool, chic lighting fixtures, and other updates can boost the sellability of your home.
Why Are These Numbers Different?
These numbers are different because they measure various factors and have other objectives. The market value for your home is all about making a transaction. The price can vary from moment to moment. But the appraised value number is a tax authority’s reasonable estimate of your property’s value to determine your tax bill. That number doesn’t have the day-by-day swings of appreciation and depreciation like homes on the market. When it comes to taxes, your payment is based on the assessed value of your property, not your market value.
While the market values influence appraised values, it’s only one of several factors. Your appraised value, on the other hand, does not have any effect on your market value. You can protest your property taxes and advocate for a lower appraised value without hurting your home’s future market value.
Related: How the Assessed Value of a Property Affects the Property Tax Rates in Texas
When Does Knowing the Difference Between Appraised Value and Market Value Matter Most?
There are three times when knowing these numbers (and the difference between them) matters most:
- If You’re Buying a Home: Your real estate agent should look at comparables and neighborhood factors to help you determine a reasonable offer amount.
- If You’re Selling Your Home: You want to know a reasonable market value for your home so you can choose between offers and the right listing price.
- Every Year When Property Tax Valuations Come Out: Each spring, when your property value notice is sent out by your local tax authority, review the appraised property value. If it looks too high or you think something on the form is wrong, you have a short window to file a protest each year.
Every local tax authority has a formal tax protest process established by the state. You must file Form 50-132, Notice of Protest, by around May 15. In this form, you’ll explain why you think the appraised value is too high and what it should be instead. You can provide counter documentation of comps, your property’s repair needs, and other support. From there, the appraisal district will schedule a meeting or hearing.
Home Tax Shield Is Here to Help You Stay in Control of Your Home’s Appraised Value
Protesting your home’s appraised value is a good strategy for lowering property taxes. If the appraised value increases, your property tax bill will also increase. At Home Tax Shield, we help homeowners by providing a home value appraisal and by managing the protest process on your behalf. Sign up today to get started!