The three types of Value

There are three types of value you must know and understand to be able to properly address your real estate value for tax purposes.

Fair Market Value

The first type of value is known as "Fair Market Value" (FMV). This is the value your property is actually worth if you were to try to sell it today. Here is what the Courts say about FMV: Appraisals of real estate are required by statute to be made on its fair market value. 32 V.S.A. Secs. 4381, 4041. The fair market value of property is the price which the property will bring in the market when offered for sale and purchased by another, taking into consideration all the elements of the availability of the property, its use both potential and prospective, any functional deficiencies, and all other elements such as age and condition which combine to give property a market value. There is no one or controlling factor.

Here is the definition of Fair Market Value (FMV) most real estate appraisers, such as ones who perform bank appraisals, follow. As you can see, both are concerned with what a property will actually sell for:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

(1) buyer and seller are typically motivated;

(2) both parties are well informed or well advised, and each acting in what he considers his own best interest;

(3) a reasonable time is allowed for exposure in the open market;

(4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and

(5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.

*Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market's reaction to the financing or concessions based on the appraiser's judgment.

You must understand that FMV is what your property is actually worth. It is the value that most buyers, who were reasonably informed, would be willing to pay for it. This is the basis for your tax assessment; the town cannot by law exceed it.

Assessed Value

The second type of value is "Assessed Value" (AV). This is the value the Town has placed on your property. This value might be less than the current FMV. It might also be more. If it is more, you have a right to grieve. The Courts consistently state that a property may not be assessed for more than FMV. (By law, real estate is supposed to be assessed at Fair Market Value as of April First. As a practical matter, this seldom occurs. Most towns do not have enough financial resources to appraise each parcel every year, therefore the town appraised value slips away from true market value over time).

Equalized Value

The third value is "Equalized Value" (EV). This value is what you should be taxed at. Sometimes the Equalized Value is the same as either Assessed Value or Fair Market Value, but not always. One way to understand this is as follows:

Assume for a moment that every property in your town had a Fair Market Value of $100,000(FMV), including your property, however the town has you assessed for tax purpose at $80,000(AV). You might be thinking you are paying less for taxes because the town has you assessed for $80,000, even though your property is actually worth $100,000. Eventually you learn that all the other properties are being assessed at $65,000, even though they are also all worth $100,000. This means your property is being over taxed when compared to everyone else's. In other words, your taxes are not equal in proportion to other property owners. In order for you to be equal, you would be entitled to a value reduction of $15,000, to bring you to $65,000(EV). This would be the "Equalized Value" of your property.

If you are buying or selling real estate in Vermont you should have a good idea of what the property is worth before making your commitment. The only way to be sure is to know how much other properties are being sold for. Subscribe to the sales database by clicking on the Register Here link in the User Login box (above left).