One of the trickiest parts of dealing with real estate is figuring how much a property is worth. When you’re talking about the value of a home, you might hear two different terms used: assessed value and appraised value. Though they sound similar, they have essential differences that are crucial to understand, whether you’re selling a home or buying one.

Put simply, assessed value is the amount your local government thinks your home is worth; it’s what is used to determine property taxes. Appraised value, though, is the amount a professional home appraiser thinks your home is worth; it’s typically used by lenders when considering a mortgage application. Typically, appraised values are higher than assessed values.

Let’s break down the key differences you need to know:

What is a home’s assessed value?

The assessed value of a home is the amount that the local government believes the home is worth. Think of it in terms of a tax assessment: Typically, the local assessor’s office assigns a value to a property based on factors such as the size and location of the lot, the size and amenities of the home and recent sale prices of similar homes in the area.

Your city or town will charge property taxes based on that assessed value. For example, if your city assesses your home at $550,000 and charges a 2.5 percent property tax, you’ll owe $13,750 in property taxes each year.

Some areas allow for certain exemptions, such as not charging tax on the first $100,000 in assessed value or exempting a portion of the value for owner-occupied homes. If you believe that the government has assessed your home unfairly and is overcharging you, you can appeal your property assessment. Doing so typically involves having an assessor visit your home to re-evaluate it.

What is a home’s appraised value?

A home appraisal is a professional examination by a qualified professional (usually licensed, though that may vary by state) to determine the value of a property. Appraisers also look at things like recently sold homes in the area, a home’s size and number of bedrooms and bathrooms, lot size and, crucially, the home’s condition and apparent level of upkeep.

Most often, an appraisal is performed is during the mortgage application process. Lenders will typically hire an independent appraiser to confirm a home’s value before they agree to issue a mortgage — they need to verify that the home is really worth the amount they’re lending the buyer. For example, if you want to get a $300,000 loan to buy a home but it only appraises for $275,000, that’s a problem for the lender. The difference, called an appraisal gap, will need to be bridged in some way, whether by renegotiating the price or paying the difference in cash, in order for the loan to go forward.

Even if a buyer isn’t financing their purchase, they may choose to get an appraisal to make sure they’re not overpaying for the property. Homeowners also sometimes commission an appraisal before they put their home on the market (called a pre-listing appraisal) to help them figure out a fair asking price.

Other ways of determining home value

There are many ways to determine the value of a home, each with pros and cons. Some other examples include:

  • Real estate comps: This valuation method involves looking at similar properties in a particular area and seeing what they recently sold for. If a two-bedroom, 1,000-square-foot home in your neighborhood recently sold for $300,000, it stands to reason that another two-bedroom, 1,000-square-foot home a block or two away would likely sell for around the same amount. (Depending on each home’s condition, of course.)
  • Comparative market analyses: Like comps, this type of analysis relies on looking at recent sales of homes in your area. It’s typically put together by a local real estate agent who knows the area well and goes into deep detail, including factors like price per square foot, condition and more.
  • Automated valuation models (AVMs): An AVM is a computer algorithm that uses existing data to determine the value of a property. Zillow’s Zestimate is one of the best known examples. These are a convenient starting point for determining value, but they are not the most accurate method — there are many different AVMs out there, and you may find that each will produce a different value for the same property.

Bottom line

Every property is unique, and finding the true objective value of a home is all but impossible. But you can use local comps and other information to come up with a pretty educated guess. A real estate agent can be very useful in determining a home’s value, and a professional appraiser is probably going to provide the most accurate number.