Careful valuation is crucial for the primary functions of the real estate economy. From the listing of a property all the way through acquiring insurance, there are three critical moments when the property will have a clear value associated with it – the market value, the assessed value and the insured value.
Market Value  Under federal code, market value is defined as the most likely price that a property should give to a competitive and open market under all the conditions required for fair sale. 1 In layman's terms, the market value is the price a buyer is willing to pay for a property. Among professional real estate companies, the market value often includes the value of land, land improvements, buildings and sometimes personal property and intangible assets.
Assessors are often engaged by their lending customers to inspect properties and determine market value based on factors such as location (ie, water, golf course, etc.), permits, features, layout and sale of similar properties in the local community.
The assessed value is a value calculated by the local property tax assessor. The property tax assessors are tasked with finding the value of a property so that it can be taxed correctly. Because assessments are often carried out at regular intervals (usually every two to three years), the estimated value may not follow the fluctuations in the local real estate market.
Appraisers rather than evaluating one property at a time are estimating the value of an entire block at a time. They do this by using mass estimation techniques.
Computer Assisted Mass Assessment (CAMA) defines all software packages used by the government to establish property valuation for property tax calculations. These programs use mathematical modeling (multiple regression analysis) to find the relationship between the sale price and other properties for property such as square footage or the age of the property. This ratio is then used to calculate the property valuation.
Mass estimation programs are particularly effective because they take into account data from all sales rather than using limited data from only a few comparable properties. This also eliminates any bias when assessors decide which property can be considered comparable.
The insured value is the cost that it would take to reconstruct a property in its entirety. This is a value used by insurance companies to help determine coverage limits for insurance, as factors in the annual premium calculation
. The insured value includes the cost of demolishing the existing structure, clearing the site of debris and building the structure currently. This means that future escalation of prices for labor and materials will be reported, as well as new building codes, building plans, access to sites and permits.
Why Value Matters
Insurance companies understand the need to use "insured value" for Coverage A to ensure that their policyholders receive enough payment to rebuild when facing the loss of their property. However, a common confusion for homeowners is the inconsistency between restoration cost values (insurance coverage) and market or appraisal values. Many homeowners mistakenly assume that the rebuilding cost is equal to the amount they paid for the property. Reconstruction costs are usually higher than market or evaluation values because they raise current material and labor costs within a certain geographical area.
Another point of confusion is often the term "Compensation Expenses New" used by the assessor and the evaluation industry. Compensation costs New often uses the building codes and labor and material costs when the property was built, rather than with current codes and costs. They also do not include demolition, debris removal, and site availability costs that are common in disaster recovery scenarios. Compensation cost New is not recommended to determine the cost of rebuilding a home.
It is important for consumers to understand the many ways in which value is defined and what role each value plays in a property's life cycle. Real estate agents, assessors, insurance companies and the information used to collect valuations are all crucial to ensure that property valuation is carried out correctly.
- Currency Controller. 12 CFR § 34.42. Retrieved from https://www.law.cornell.edu/cfr/text/12/34.42ebrit19659019 Premiere The most important insurance news in your inbox every working day.
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