Did I overlook this - tax assessment?

8 Replies

Hi All,

I bought a SHR in Philly from a rehabber a few months back for 70,000$. After PITI, PM fee, capex & vacancy reserve, it cash flows around $300 monthly. The property before the rehab was very likely a foreclosure, or run down.

I was thinking today that the tax figure I used in my projections, which is around $750 per year (around 63 a month) (an estimate I pulled from zillow as an estimate, and what I actually ended up paying for the 2015 year when I closed) is based on  the old value of the property before it was rehabbed. Now that its rehabbed, the philly city site shows the new purchase price of 70,000$ when you look up the property.

Did i use too conservative of an estimate for the property tax in my projections? Now that the city has recognized a sale, I should be expecting a new tax assessment to reflect the latest sale price of 70,000$ correct? I know the city re-assesses certain neighborhoods once every three years or so, but I think since permits were pulled for my rehab, they will come after the taxes even quicker since they know work was done. Even if permits were not pulled, I would still be expecting a higher tax assessment due to the increased purchase price recorded from the sale correct? So regardless of whether permits were pulled, the sale price would trigger an increased tax assessment, but might have just delayed it a year or two?

I researched what some comps in the area are paying for a comparable house worth 70,000, and the yearly taxes were around 1,000$, nearly a 30-40% increase!! a 30-40% increase wouldn't be so terrible that it eats up all my cash flow, but it does decrease the returns a bit, but the property would still be performing.

If all this is true, this is a pretty well learned lesson!

Kenton

I think your guess about higher taxes will be the reality. Cities & Counties are constantly seeking new $ sources. RE sales & renovations are a sure ticket for them.

I remodeled my personal residence about 7 years ago and that same year it was reassessed and increased by the amount of the renovation. 

When we rehabbed our home we pulled permits but didn't add any bathrooms or bedrooms. After all the work was done the county came by and wanted to see inside the house. No way!! They haven't raised our property taxes but every once in a while they try & come see the quality of work. Of course we didn't sell so it's a little different situation. My pointer is that even tho the sale triggered a higher price it would all depend on when the last time they sold and did the assessed value. Don't ever let them in to see the quality of the work.

 I agree with @Brian Tremaine .  cities and counties would look to find any way or reason to raise the tax assessment value. So it would be smart on their part to pay attention to things like permits being pulled or sale prices going up on the same property.  But like you said @Kenton C. it'll still flows very well and the learning experience is just as valuable.  

@Kenton C. , you asked: "Did i use too conservative of an estimate for the property tax in my projections", whereas I believe you meant: "Was I not conservative enough in my estimate for the property tax in my projections"?

Yes, you should have taken into account that your next Tax assessment would be based on your Buy price rather than any previous value. But that COULD have worked in your favor, if the previous sale price was even HIGHER!

But, you might still be ahead if its ACTUAL current value is a lot higher than $70k (because of all the work you've had done since).

(Are people in the habit of telling the County to get lost rather than let them in?)...

Originally posted by @Ellie Hanson :
 Don't ever let them in to see the quality of the work.

We did a new build for my son & when the part-time 'farmers wife' assessor wanted in she advised that if she didn't get in she would 'guess-assess' it high regardless. (& we heard she has done exactly that). So she we reluctantly allowed her in.

She mistook laminate flooring for hardwood, assumed the counter tops were granite & the assessment was $90k higher than our actual build cost. But she did miss the extra bedroom & bath we had drywalled off. 

Yet when I rehabbed a home we bought for my daughter in a different area that assessor provided us with paperwork that promoted a calculated drop in assessed value for homes being rehabbed. She took pics before & after & dropped the assessment $40k for 5 years after which it could only increase gradually by $15k. But she did miss the 20x8ft walk-in closet I built for my daughter off the master bath over the garage. The obnoxious building inspector was a different story.

A similar home to my daughters in original 1980's condition just sold for $75K more than what we paid so the equity is there for her.

Taxes often increase after a sale. This is especially true when a property has homestead exemptions and then those are lost when it is put in service as a rental. I don't know your state regs, but in most instances, you should expect rising taxes. Have you ever had the government give you a break? Nuff said:)

Is there generally a cap to how much the taxes can raise in one year?

Tax assessments on real estate vary from state to state. Some taxes have a cap on assessed values for real estate, but not all stated do. Some states have a cap on how much real estate tax rates can increase, but not all states do. For this reason and more (like abatements, homestead exemption qualifications) simply call your local assessor to get the information "straight from the horses mouth" as they say in Texas. Why speculate on what the grapevine tells you about such an important recurring expense item? And in this day and age, why not let the assessor in? Believe me when I say that local assessors are called daily by lenders, bank auditors, and investigators for various government-sponsored programs. When loan or application data doesn't match the local assessment records red flags go up! Then who loses? How much extra time do you have to explain why the local assessment records don't match what is in other data files?

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