Appraisal vs. assessment — What’s the difference?

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I cannot tell you how many times I hear the words "assessment" and "appraisal" used interchangeably. While both words define the value of a home, they do so in very different ways.

An appraisal is done for the purpose of determining the current market value of a specific property on a specific date. It is usually done to satisfy a lender. An appraiser uses similar properties (comparables, or "comps") that have sold recently and adjusts for differences, such as square footage, number of bedrooms and baths, updates, and location to arrive at a value for the home being appraised.

An assessment is quite different. Municipalities do them to determine property taxes, so what you pay is based on your home's assessed value. For example, if the town tax rate is $15.66 per $1,000 and the assessed value of your home is $400,500, the tax for that year on the property will be $6,271.83. To determine your home's assessed value, municipalities don't look at current comparable sales, however. The assessed value for fiscal 2016 is actually based on sales in 2013 and 2014, according to Ray Boly, assessing manager for the town of Lynnfield.

In an aggressive market like this, many buyers are concerned that the municipality will assess their new home at the purchase price, but it could be a year or two before that's reflected in the assessment. As a matter of fact, Boly said, starting in 2017, Massachusetts municipalities will do a revaluation of properties every five years instead of three. They can, however, make yearly interim adjustments based on market rates or changes made to the property.

The lag time between the purchase price and when it's factored into the assessment is why the assessed value of a home is often much lower than the appraised value, Boly said.

Another reason, he said, is that a property owner may have updated or renovated the home before putting it on the market. This would raise the market value, but that increase might not be reflected in the current assessment.

Appraisals can have immediate and sometimes dramatic implications for the final sale price of a home. If a house appraises for lower than the proposed purchase price, the lender may lower the amount of the loan, and the buyer may not be able or willing to increase the down payment to make up the difference. It may result in a renegotiation, or, worse, the deal could fall apart.

Many buyers expect the appraisal to come in at the purchase price. Otherwise, they feel that they would be overpaying.

Like everything in real estate, education is key. Do your best to understand the process and terms. Knowing what could happen prepares buyers and sellers for situations they might not otherwise have considered.